Tax Loss Harvesting Your Portfolio For The Win

No one ever sets out to invest money and have it end up as a loss, but over time, most investors will end up with some winners and some losers. A strategy called tax-loss harvesting is a way to create a positive outcome from it all.

What is Tax-loss Harvesting?

Tax-loss harvesting is when you sell some investments at a loss to offset gains you’ve realized by selling other stocks at a profit. By only having to pay taxes on your net profit (gain minus loss), you effectively reduce your tax bill. This is not the case in retirement accounts (e.g., IRAs) – only in non-retirement accounts such as individual, joint, brokerage, or trust accounts.

Investors can use the proceeds from selling their down investments to fund purchases of similar investments that may grow over time and help recoup their losses. These transactions must all be done before the end of the tax year, December 31 of any given year.

Rules for Tax-loss Harvesting

There are rules to keep in mind while navigating your next purchase. You can’t, for instance, sell a stock to realize a loss and minimize your tax burden—and then rebuy that exact same stock, or even one that’s nearly identical.

This transaction is referred to as a wash sale. A wash sale occurs when you sell securities at a loss and within 30 days before or after the sale buy “substantially” identical stocks.

The wash sale rule does not, however, preclude purchasing securities in the same industry. For example, if you sold energy company A and bought energy company B index fund instead, you’re good to do so. It just can’t be the exact same stock.

Carryover Provision

Even if you realized a capital loss and didn’t realize a capital gain to offset it in the same year, it can still be an effective strategy thanks to the capital loss tax deduction and carryover provisions. That’s because investment losses can also be used to offset taxes on your ordinary income. If you have more than $3,000 in realized losses, the excess losses can be carried over into future tax years in $3,000 increments.

Be sure to consult your CPA or tax preparer on short- and long-term capital gains tax code specifics if you plan to take this process on by yourself. Otherwise, a financial advisor can help you implement this, and other tax planning strategies to help you reach your retirement goals. Schedule an appointment to discuss your retirement future.