Tips for Tax-Loss Harvesting Tips for Tax-Loss Harvesting

Tips for Tax-Loss Harvesting

April 4, 2022

This week’s reader question: What is the best way to think about tax-loss harvesting—what are your thoughts on timing and best practices?

Cathy Lee, Tax Associate, had this to say:

Tax-loss harvesting—selling a losing investment to reduce your tax obligations—can help minimize taxes by offsetting capital gains and up to $3,000 in ordinary income each year for individuals. Any unused losses (for example, if you didn’t realize any gains or reach the $3,000 limit in ordinary income) can be carried over and spread across several tax years.

But remember: Tax-loss harvesting is only effective when it’s applied properly and strategically.

The first guardrail to keep in mind is the wash-sale rule, designed to deter the sale of securities simply for tax avoidance. In sum, you can’t sell an investment for a loss and have purchased the same holding or one that is “substantially similar” within 30 days before or after the loss. For instance, if you sell your position in, say, Vanguard’s S&P 500 Index fund, you can’t obtain the tax benefit of the loss if you purchased Vanguard’s S&P 500 ETF in the 30 days before or after the sale.

photo of tax associate cathy lee and quote stating “Tax-loss harvesting is only effective when it’s applied properly and strategically.”

Next, tax-loss harvesting doesn’t necessarily come into play at the end of the calendar year or during tax season. Instead, it’s most useful when conditions are right. For instance, you’re more likely to experience losses when volatility causes ongoing market swings. The other opportune time to think about tax-loss harvesting is when you are rebalancing your portfolio. If you are planning to trim a position to tune up your asset mix or change your risk exposure, it may also be a good time to look for a tax upside.

Oh, and tax-loss harvesting only applies to your taxable accounts, so it’s not relevant to your 401(k), IRA or other retirement accounts.

All of this adds up to one key takeaway: Tax-loss harvesting is something to consider in support of your long-term investment strategy. Reserve your trades for when they will benefit your overall portfolio and financial goals—saving on taxes is icing on the cake.

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For informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities.  All investments carry risk of loss and there is no guarantee that investment objectives will be achieved. Past performance is not an indication of future returns.  Always consult a financial professional before taking specific action. Tax, legal and insurance information contained herein is general in nature, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

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