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The Fearless Advisor! How to Maximize Your Tax-Loss Harvest | F5 Financial is a fee only wealth management firm with a holistic approach to financial planning, personal goals, and behavioral change.

How To Maximize Your Tax-Loss Harvest

Be strategic in handling asset-value declines. Tune in here to learn how to offset capital-gains taxes by maximizing your tax-loss harvest!

(Video is 4 minutes. The full transcript is below.)

Full Transcript of video

Hey friends, the Fearless Advisor here. Today I am going to discuss maximizing your tax-loss harvest.

Creating a well-diversified portfolio is the foundation of growing wealth. But there's an aspect that may help increase your overall return—and it isn't just an investment strategy.

Being strategic about handling asset value declines is also a tax strategy.

It can help you offset capital-gains taxes resulting from managing your portfolio or taking income in retirement.

How does it work? Let’s dive in.

Rebalancing your portfolio to keep your investment strategy and risk tolerance on track can mean you have to trim back a position that has gained substantially. The sale, if the investment is held in a taxable account, could create either a short-term or a long-term capital gain.

The IRS allows you to offset capital gains with a capital loss.

If losses are greater than gains, you can carry the loss forward until it is all offset. You can also use up to $3,000 of losses to offset ordinary income.

But how do you know which position to sell?

Tax savings are important, but your investment strategy should be the main consideration. Some reasons to sell an investment (other than just rebalancing) are:

  • It doesn't fit your existing investment strategy, or you want to change.
  • The growth prospects have dimmed.
  • The position can be easily replaced with something else with similar utility in your portfolio.

Let’s discuss getting the most out of the tax rules.

The IRS has created a hierarchy for how losses can be used to offset gains.

First, they have to be used against the same type of gains. So, short-term losses offset short-term gains, and long-term losses offset long-term gains.

If your short-term losses are greater than your short-term gains, the excess can be applied to long-term gains and vice-versa.

Next, if you are selling a position that you acquired over time at different costs, look at the cost basis and maximize your tax benefits by selling the highest-cost-basis shares.

Once the sales are complete, you’ll want to replace the asset in your portfolio. There are some IRS rules to follow.

You want to maintain your portfolio diversification, so unless your strategy has changed drastically, you may want to purchase a similar asset.

This can get tricky. The IRS has created a rule to prevent simply switching out of a loss for the tax benefit and then repurchasing the asset at a lower cost.

It's called the "wash-sale rule" and states that your write-off will be disallowed if you purchase the same or a substantially identical security within a 30-day window either before or after you sell to harvest a loss.

This is usually efficiently manageable—but if you have an Employee Stock Purchase Plan with a specified purchase date, or you hold company stock that has a vesting date, you'll need to be extra careful and aware of your dates.

If the position you sell represents an industry-sector exposure, you can generally replace it with a mutual fund or ETF without creating a wash sale. Just be aware of the costs of the transaction.

You should think about tax-loss harvesting as part of ongoing portfolio management and effective tax-planning.

It can be part of an annual rebalance, or you may keep the tax benefits in mind as you opportunistically invest throughout the year.

If you are interested in implementing tax loss harvesting in your portfolio, please reach out to us here at F5 Financial. Thanks for joining us!

 

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F5 Financial

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Josh Duncan

Josh Duncan

Josh Duncan is a Certified Financial Planner at F5 Financial. He grew up near Peoria Illinois and attended Eastern Illinois University where he earned a B.S. in computer science. He also holds an MBA from Capella University.