Harvesting Your Portfolio: A Fall Guide to Tax-Loss Relief

Embracing Fall: The Season of Change and Cleanup

The crisp autumn air and the sight of falling leaves mark a transitional time of year. It's a cozy period for sipping warm cider and enjoying the vibrant hues of nature shedding its old layers, preparing for the chill of winter. Similarly, our financial portfolios might benefit from shedding some underperforming investments before year-end, turning challenges into potential tax breaks through a strategy called tax-loss harvesting.

What is Tax-Loss Harvesting?

Tax-loss harvesting is a financial strategy where you sell investments that have decreased in value to “lock in” a loss. This move may not sound appealing, but it can actually be a savvy way to reduce your tax liability. The loss you lock in can be used to offset gains elsewhere in your portfolio or even cut down your taxable income.

Identifying Investments with Losses

As you review your portfolio, you might spot some “losers”—investments currently worth less than what you paid for them. Assessing these underperforming assets is the first step in the tax-loss harvesting process.

Sell to Lock in the Loss

Executing a sale to realize a capital loss is essential. This action secures the loss in your records, paving the way to potential tax benefits.

Offsetting Gains

Once you have recorded these losses, they can directly offset taxable gains from other investments. For example, if you had a $6,000 capital gain and a $4,000 capital loss, your taxable gain could drop to just $2,000.

Offset Income If No Gains Exist

If you hold more losses than gains, you can use up to $3,000 annually to offset regular income, with the potential for reducing your taxable income further.

Carry Forward Extra Losses

For losses exceeding that $3,000 limit, there's the option to carry these forward, applying them to future tax years and potentially reducing future tax liabilities.

Example Calculation

Imagine realizing a $4,000 loss but having a $6,000 gain elsewhere in your portfolio. The loss can offset a portion of that gain, reducing it to a taxable $2,000, demonstrating how savvy tax-loss harvesting can be.

Beware of Wash Sale Rules

The tax code includes a “wash sale” rule, which warns against purchasing the same or substantially identical investment within 30 days of the sale. Ignoring this stipulation can disallow the tax benefit of your claimed loss.

Matching Short- and Long-Term Gains and Losses

To maximize tax benefits, ensure you correctly pair short-term gains/losses with each other and do the same for long-term gains/losses. This meticulous matching maximizes potential tax savings.

A Tool for Efficiency, Not Perfection

While tax-loss harvesting is a valuable tool for enhancing tax efficiency, it doesn’t erase a tough year of market declines. It's a complementary strategy rather than a cure-all, hinging on your individual income, investments, and financial goals.

As leaves fall and we cozy up for the winter season, consider clearing your portfolio clutter through a methodical approach to tax-loss harvesting. This smart, proactive step could lighten your tax load. Just remember, the end-of-year clock stops for no one—act now and consult a financial advisor to weigh if this strategy suits your unique needs. If you don't have a financial advisor currently or are looking to connect with someone new, please contact our office so we can provide you with a referral to a trusted advisor.