Insights + Resources

Tax-Loss Harvesting

Sep 16, 2022

A useful move to counteract capital gains

At one point or another, you may realize capital gains, which is a taxable event. What can you do about them? You can do what some investors do – you could recognize investments with a loss and practice “tax-loss harvesting.”

Keep in mind this article is for informational purposes only. It’s not a replacement for real-life advice, so make sure to consult your tax legal and accounting professional before modifying your investment strategy.

 Selling losers to offset winners.

Tax-loss harvesting means taking capital losses (you sell securities worth less than what you first paid for them) to help offset the capital gains you may have recognized. Keep in mind that the return and principal value of securities will fluctuate as market conditions change and past performance is no guarantee of future returns.1

While this doesn’t get rid of your losses, it can be an approach to manage your tax liability.

The tax-saving potential.

Sure, you can use this technique to put your net gains at $0, but that’s just a start. Up to $3,000 of capital losses in excess of capital gains can be deducted annually, and any remaining capital losses above that can be carried forward to, potentially, offset capital gains next year. But remember, tax rules are constantly changing, and there is no guarantee that the treatment of capital gains and losses will remain the same.1

So, by taking losses this year and carrying over the excess losses into the next, you can potentially offset some (or maybe all) of your capital gains next year.

The strategy in action.

It is really quite simple. Step A is to pick out the losers in your portfolio. Step B is deciding which losers to sell. Step C is giving the green light to those transactions. Your portfolio may reflect your time horizon, risk tolerance, and investing goals. So, before moving ahead with a trade, it’s important to understand the role each investment plays in your portfolio.1

You must watch out for the I.R.S.’s “wash-sale rule,” however. You can’t claim a loss on a security if you buy the same or a “substantially identical” security within 30 days before or after the sale. In other words, you can’t just sell a security to rack up a capital loss and then quickly replace it. Your investment professional can illustrate how a “wash sale” works.1

Watch the fine print on wash sales.

The wash-sale rule applies to your entire taxable portfolio, not just one taxable account within it. So, as an example, if you sell individual holdings of stock in a company, you still must wait for the wash-sale window to close before you can purchase shares of that same firm. Also, the wash-sale rule applies to multiple taxable accounts – worth remembering if you and your spouse file your taxes jointly.1

The (minor) drawbacks.

It’s important to stress that you may not wish to alter a carefully chosen portfolio simply for tax-loss harvesting, especially if it has been built for the long term.

You can only practice tax-loss harvesting in taxable accounts; tax-advantaged accounts are ineligible for this strategy. Transaction costs can add up, so think about those potential costs versus the overall strategy before you begin.1

Not just a year-end tactic, but also a year-round strategy.

Some investors harvest losses throughout the year, not just in December. You may want to ask the financial professional you know and trust how you can harvest losses.

For more insights and resources, be sure to sign up for our Weekly Market Commentary. Follow our YouTube channel where we regularly post our Epic Market Minute videos. Follow us on LinkedIn, or like us on Facebook. And as always, please don’t hesitate to reach out to a dedicated service professional at Epic Capital.

Tags: , , , , , ,

More Insights

Sep 23, 2022

The Federal Open Market Committee (FOMC) increased the target rate by 75 basis points (bp) to a 3.25% upper bound and delivered a more pessimistic outlook in their published Summary of Economic Projections.

Sep 21, 2022

  You may have seen this statistic before or one resembling it: the average 65-year-old retiring couple can now expect to pay more than $250,000 in healthcare costs during the rest of their lives. In fact, Fidelity Investments now projects this cost at $285,000. The effort to prepare for these potential expenses is changing the … Continue reading “Healthcare Costs are Cutting into Retirement Preparations”

Sep 19, 2022

Investors are routinely warned about allowing emotion to influence their decisions. However, they are less routinely cautioned about their preconceptions and biases that may color their financial choices. In a battle between the facts & biases, our biases may win. If we acknowledge this tendency, we may be able to avoid some unexamined choices when … Continue reading “Do Our Emotion or Biases Affect Our Financial Choice”

Sep 16, 2022

At one point or another, you may realize capital gains, which is a taxable event. What can you do about them? You can do what some investors do – you could recognize investments with a loss and practice “tax-loss harvesting.”

Sep 14, 2022

Everyone loves a winner. If an investment is successful, most people naturally want to stick with it. But is that the best approach? It may sound counterintuitive, but it may be possible to have too much of a good thing. Over time, the performance of different investments can shift a portfolio’s intent as well as … Continue reading “Rebalancing Your Portfolio”

Insights + Resources >