The end of each year is a busy time and not just due to the hustle bustle of the holiday season. While some tax-loss harvesting is done throughout the year, most of it is concentrated in the last couple of months of the year, making it a busy time. The main reason for this is that December 31st is the cutoff to harvest any losses and still get the benefit in the current tax year.
What is Tax-Loss Harvesting?
You’ve probably heard the term “tax-loss harvesting” before but may have wondered what does that actually mean? It’s a fairly simple concept but the execution of the strategy can become complex. Let’s start with the basics.
As you know, if you own an investment in a taxable account and it increases in value before you sell it—which is the general idea of investing—you know that Uncle Sam stands ready to assess taxes on that increase. Ok, so that’s not such a novel idea—we have to pay taxes when we make money in investments. But, what about the flip-side? What if markets present us with a volatile year and some of our holdings have actually lost value? Believe it or not, there is a silver lining to this situation. Because Uncle Sam makes money when we do from the taxes we pay, Uncle Sam should also have to “lose” money when we do to keep it fair. So essentially, if we sell a holding that has lost value and we lock in that loss, we can actually use that loss to offset similar gains in other assets we hold and even carry it forward to future years if we have no gains to offset.
Tax-Loss Harvesting Rules
“Locking in a Loss” doesn’t intuitively sound very attractive, but it is possible to keep your portfolio risk targets intact and stay exposed to these attractive prices while still harvesting losses for tax purposes. This is where it can get complex because you have to make sure you don’t violate wash sale rules associated with this practice, but suffice it to say, as long as one makes sure to execute properly, there is often a lot of money to be saved in taxes by searching for tax-loss harvesting opportunities in your portfolio.
If you find this topic interesting or would like to learn more about how tax-loss harvesting affects your portfolio, please feel to reach out to our team.
You can also see the follow-up article Tax-Loss Harvesting and Your Investment Planning by Terry Prather that we published the following week.
Published: December 16, 2015
Author: Bethany Muensterman, CFA
Phone: (812) 602-6307
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The information in this material is only as current as the date indicted, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements.