Decoding Tax-Loss Harvesting

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June 2, 2022

Posted in Decoding

You know the adage: “When life gives you lemons, make lemonade.” During the market downturn, we’ve been watching for opportunities to apply this wisdom to client portfolios using a practice called tax-loss harvesting. But how can taking a loss be a good thing?

As a rule, it’s not a good idea to sell investments in your portfolio and then hang out on the sidelines. However, tax-loss harvesting is one of the many tax-smart strategies we consider in a down market.

Many clients wonder what in the world we’re talking about when we suggest tax-loss harvesting. Also called tax harvesting or loss harvesting, it’s a strategy in which you intentionally sell an investment at a loss to offset current or future capital gains with capital losses. Enter the lemonade: doing this can lower your tax bill and better position your portfolio going forward.

 

How it works

Tax-loss harvesting generally works like this:

  1. You sell an investment that’s underperforming the market and losing money.
  2. Then, you use that loss to reduce or eliminate your taxable capital gains and potentially offset up to $3,000 in income per year.
  3. Finally, you reinvest the money from the sale into what is not a “substantially identical” security (per the IRS) to meet your investment needs and asset-allocation strategy.

By making this swap of holdings, your asset allocation is maintained, and you don’t miss any time out of the market.

Source: Napkin Finance ®

 

Rules to consider

As with any tax-related strategy, there are rules and limitations:

  • The U.S. federal government allows investors to use capital losses to offset capital gains in a current tax year or carry the loss forward into future years.
  • Tax-loss harvesting isn’t useful in retirement accounts.
  • There are restrictions on using specific types of losses to offset certain gains.
  • To ensure investors don’t get a tax break from a sale and then immediately buy back their original investment, there’s the “wash-sale rule” that applies.

If you’d like to discuss tax-loss harvesting as a tax-smart strategy for your portfolio, please reach out to your Planning team.

 

 

 

If you'd like to learn more about what it's like to work with our team, please reach out.

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The commentary expressed herein reflects the personal opinions, viewpoints, and analyses of Johnson Bixby employees and is not necessarily that of Private Client Services, LLC and should not be construed as investment advice. The views expressed are subject to change at any time without notice. Johnson Bixby and Private Client Services do not offer tax or legal advice. Always consult a tax or legal professional regarding your individual situation. Nothing in this article constitutes personalized investment advice, an offer, or solicitation to buy or sell any specific security or adopt any specific investment strategy. Any reference to specific securities or performance is for illustrative purposes only and should not be considered a recommendation. Investing in securities involves risk, including the potential loss of principal. Past performance is no guarantee of future results. Diversification does not ensure against loss. Advisory services offered through Johnson Bixby, an SEC Registered Investment Advisor. Securities offered by Registered Representatives through Private Client Services. Member FINRA/SIPC.

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