By: Jim Watson, Director of Investments & Client Experience, Trost Financial

You may have heard the term tax-loss harvesting and always wondered what it meant. Well, I can tell you it has nothing to do with getting up at the break of dawn to harvest a crop.

Simply put, tax-loss harvesting is a strategy designed to reduce your overall tax bill so you can keep more of what you earn from your investments.

Tax harvesting works by selling investments at a loss and using those losses to offset some – or possibly all – the capital gains from investments that you sold at a profit.

I have outlined a few of the primary investment strategies that can be implemented to keep your portfolio diverse. As always, please consult your advisors for next steps.

  • Consider the wash sale rule, which restricts you from buying a “substantially identical” investment within the 30-day window before or after the sale.
  • Generally, those losses can then offset any capital gains from selling securities. They can usually also offset up to $3,000 in other income. For example, if you’re going to have to recognize $5,000 in capital gains in an investment account, you might sell other investments that would similarly generate a recognized loss of $5,000. In doing so, you may be able to cut your capital gain — which can lower your tax burden.
  • One thing to note is that tax-loss harvesting only works on taxable investments. Many retirement accounts, such as IRAs and 401(k) accounts, are tax-deferred not allowing you to offset taxable gains. Therefore, you cannot use this strategy with these accounts.
  • There are restrictions on using specific types of losses to offset certain gains. A long-term loss would first be applied to a long-term gain, and a short-term loss would be applied to a short-term gain. If there are excess losses in one category, these can then be applied to gains of either type.
  • Be aware that selling positions in your portfolio can disrupt your portfolio balance.

To recap, tax harvesting is when you sell an investment that is underperforming and losing money. You then use that loss to reduce your taxable capital gains and potentially offset up to $3,000 of your ordinary income.

Let’s discuss how Tax Harvesting can be implemented into your strategy! Book a call today: