How Tax Loss Harvesting Can Enhance Your Portfolio

Tax loss harvesting is a powerful strategy that can help investors maximize the tax efficiency of their portfolios while staying on track to meet their long-term financial goals. While it might sound technical, it’s a straightforward tactic with significant potential benefits, especially in volatile markets. Here’s a breakdown of what tax loss harvesting is, how it works, and why it’s something you should consider.

What Is Tax Loss Harvesting?

Tax loss harvesting involves selling investments that have decreased in value to "harvest" a capital loss. This loss can be used to offset capital gains elsewhere in your portfolio, reducing your overall tax liability. If your losses exceed your gains, you can use up to $3,000 per year to offset ordinary income, and any excess losses can be carried forward to future years.

In essence, this strategy allows you to make the best out of a market downturn or a poor-performing asset while maintaining the overall integrity of your investment plan.

How Does It Work?

Let’s say you own two stocks: Stock A and Stock B. You purchased both at $10,000, but Stock A has increased in value to $15,000, while Stock B has dropped to $7,000. If you were to sell both, you’d realize a $5,000 capital gain on Stock A and a $3,000 capital loss on Stock B.

Instead of paying taxes on the entire $5,000 gain, you could apply the $3,000 loss from Stock B to reduce your taxable gain to $2,000. This minimizes your capital gains tax liability, freeing up more of your investment capital.

Why Consider Tax Loss Harvesting?

1.????? Reduce Taxable Income: By offsetting gains with losses, you effectively lower the amount of income subject to taxation. If you're in a high-income bracket, this can mean significant savings.

2.????? Maintain Your Portfolio: One of the concerns investors often have is the fear of deviating from their long-term strategy when selling a losing asset. Tax loss harvesting doesn’t necessarily disrupt your overall investment plan. After selling the losing asset, you can reinvest in a similar, but not identical, security to maintain exposure to your desired market sectors. This allows you to benefit from a tax break without losing your market position.

3.????? Carry Forward Losses: Losses that exceed your capital gains can be carried forward into future years, creating ongoing tax benefits.

A Few Things to Keep in Mind

????? Wash Sale Rule: The IRS has a “wash sale” rule that prevents investors from claiming a tax deduction if they repurchase the same or a substantially identical security within 30 days before or after the sale. To avoid this, consider buying a similar investment that fits your portfolio's needs without violating the rule.

????? Timing Matters: Tax loss harvesting is typically performed at the end of the year, but savvy investors may take advantage of market dips throughout the year to harvest losses.

????? Consult a Professional: While tax loss harvesting can provide significant benefits, it's important to integrate this strategy into your broader financial and tax plan. Working with a financial advisor or tax professional helps to ensure you’re maximizing your advantages without unintended consequences.

Is Tax Loss Harvesting Right for You?

Tax loss harvesting isn’t for everyone. If you’re in a lower tax bracket or have no capital gains to offset, the benefits might not be as significant. However, for high-income earners or those with large capital gains, it can be a game-changer.

?As markets ebb and flow, being proactive with your investment strategy can make a substantial difference in your portfolio’s overall performance. By implementing tax loss harvesting, you can capture opportunities in down markets and manage your tax exposure, all while maintaining a disciplined, long-term approach to investing.

Final Thoughts

Smart investing isn’t just about picking the right assets—it’s also about managing your portfolio in a way that maximizes your tax advantages. Tax loss harvesting is a key strategy in that process. Whether you’re navigating volatile markets or simply optimizing your portfolio, understanding and leveraging tax loss harvesting can help you keep more of your investment gains where they belong—working for you.

Want to learn how tax loss harvesting fits into your financial plan? Let’s connect and explore how to make this strategy work for you.

?Disclosures

The information provided in this article is educational in nature and is not intended to be a recommendation for any specific investment product, strategy, plan feature, or other purposes. Accordingly, it should not be construed as personalized business, legal, financial, investment or tax advice for compensation.