Tax Loss Harvesting: How to pay less tax

What is it:

Tax-loss harvesting means selling securities(stocks, bonds, mutual funds and other investments) for less than what you initially paid for them. This will offset any capital gains you may have.  While this doesn't get rid of your losses, it can help you manage your tax liability.

Often investors will replace the traded security with a different, but correlated asset.

How it Works:

For example, if you bought stock ABC for $10,000, then sold it for $5,000, you would have a capital loss of $5,000.  This could be used to reduce any capital gain you have in this, or any future year.

If you have more capital losses than you do capital gain, you may deduct up to $3,000 of excess capital loss on your federal tax return each year. (States may vary) Any remaining capital losses may be carried forward, potentially offsetting capital gains or ordinary income in following years, capital losses do not expire.

By taking losses and carrying over the excess losses into the future, you may be able to manage some long-term and short-term capital gains, even in years where you are unable to tax loss harvest.

Risks and Drawbacks:

While capital loss harvesting can be a powerful tool, there may be some risks and drawbacks.

One of the first risks to be aware of is the “wash-sale” rule. If you buy the same or "substantially identical" security within 30 days before or after the sale, you can’t claim that loss, and the window may even be 61 days in certain circumstances. In other words, you can't just sell a security claim the capital loss and then quickly replace it.  Be especially cautious about selling a security in a non-retirement account, then repurchasing it in a retirement account.

Since you cannot immediately replace the exact same security, you could receive different returns from what you could have otherwise. However, with mutual funds or ETF’s it is possible to get a similar, yet substantially different fund to replace your original investment.

You can’t tax loss harvest in a retirement or tax-advantaged account, only taxable accounts.

Keep in mind that this article is for informational purposes only and is not a replacement for real-life tax advice. Be sure to consult your tax professionals before implementing any tax strategy that may involve tax-loss harvesting.

If tax loss harvesting is something you want to learn more about, or you have another question, give us a call at 336-547-9999.  We are a team of CERTIFIED FINANCIAL PLANNERS™, Linus Whitlock and Logan Whitlock, that work closely with CPA’s.  We believe it is not just what your investments make that matters, but what you get to keep.  We specialize in retirement and retirement income planning.