Provided by Robert Warther, Warther Private Wealth
What is Tax Loss Harvesting?
Tax loss harvesting is a method that many investors use to reduce the amount of capital gains or income tax that they are required to pay. Tax loss harvesting is achieved by selling an investment at a loss and using that loss to offset their tax obligations. One limitation of tax loss harvesting is that it can only be completed in taxable accounts, such as an individual or joint brokerage account. You are not able to use IRA’s or 401(k)s for tax loss harvesting because they are tax deferred accounts, meaning there are no capital gains to offset by selling for a loss.
Step 1: Review your Portfolio
It is important to consider carefully what security you will sell to realize your losses. Any mutual fund, ETF or individual stock can be used to harvest a loss. Consider what a security might do in the short and long term before you decide to use it to realize some losses.
Step 2: Find a Similar Security to the Current one
Investors often aim to have a diverse portfolio, with exposure to multiple market sectors. By finding a similar investment to the one you will use to realize your losses, you can then maintain your exposure to the market while realizing your losses as well.
Step 3: Sell for a Loss and Purchase the similar Security
This step is pretty self-explanatory, you will sell your current security to realize the loss and buy the similar security to maintain your market exposure.
Step 4: Hold the Similar Security
This is where tax loss harvesting can get a little tricky. In order for you to actually realize the losses on your original investment, you cannot purchase it again for 31 days, or a month. If you were to purchase the original security again in less then 31 days, it would be considered a wash sale. This wash sale rule is used to prevent investors from claiming artificial or fake losses.
Step 5: Consider Repurchasing the Original Security
After 31 days have passed, you will be able to repurchase the original security without it being considered a wash sale. This is when you can determine if the original or similar security is a better choice for you.
Other Considerations
There are a few other factors that you should consider regarding tax loss harvesting. The first consideration is that you can only realize up to $3,000 in losses per year (Single or Joint Filers). If you are Married but filing separately you can deduct up to $1,500 per year. Any losses that you are not able to deduct this year can be used on future tax returns. Another thing to consider is the administrative costs that sometimes accompany a buy or sell. Does the benefit from the loss outweigh the administrative fees to cover the trade? A good time to harvest tax losses are when you are re-balancing your portfolio. This will help you identify securities that may be lagging or not performing well, which are good candidates for tax loss harvesting.
Robert Warther may be reached (239) 276-7939, or bob@wartherprivatewealth.com.
Investing involves risks, and investment decisions should be based on your own goals, time horizon, and risk tolerance. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
Securities offered through Independence Capital Company, Member FINRA/SIPC, a registered broker-dealer. Investment Advisory services offered through Warther Private Wealth, LLC, a Registered Investment Advisor ("RIA"), registered in the State of Ohio. Independence Capital Company, Inc and Warther Private Wealth are not affiliated. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The information contained herein is based on sources we believe reliable but is not considered all-inclusive. Past performance is no guarantee of future results. Please contact your Financial Advisor with information regarding specific investments. Opinions are our current opinions only and are subject to change without notice. Generally, investments are NOT FDIC INSURED, NOT BANK GUARANTEED, and MAY LOSE VALUE.
Sources: