For high-net-worth investors and anyone looking to maximize after-tax returns, tax loss harvesting is a powerful and underutilized wealth management strategy. By strategically selling investments at a loss, you can offset capital gains and reduce your taxable income—without derailing your long-term portfolio goals.
What Is Tax Loss Harvesting?
Tax loss harvesting is the process of selling an investment that has decreased in value to “harvest” the loss for tax purposes. These losses can then offset capital gains (both short-term and long-term) and up to $3,000 of ordinary income per year. Any unused losses can be carried forward to future years.
How Tax Loss Harvesting Works
- Identify underperforming assets in your taxable investment accounts.
- Sell those positions to realize a capital loss.
- Reinvest the proceeds in a similar—but not identical—asset to maintain your portfolio’s risk profile and comply with the IRS wash-sale rule.
Example of Tax Loss Harvesting
Suppose you sell a stock at a $10,000 loss and realize $10,000 in capital gains elsewhere in your portfolio. Your capital gains tax liability is effectively wiped out for the year, reducing your overall tax burden.
Key Rules to Know
- Wash-Sale Rule: You cannot repurchase the same or “substantially identical” security within 30 days before or after the sale. Violating this rule disqualifies the tax loss.
- Only applies to taxable brokerage accounts, not tax-advantaged accounts like IRAs or 401(k)s.
- Must be executed before the end of the calendar year to impact that year’s taxes.
Tax Loss Harvesting and Your Wealth Plan
Tax loss harvesting works best when it’s part of a larger tax-efficient investing strategy. A fee-only financial advisor or tax professional can help identify opportunities and avoid costly mistakes. Automated platforms (aka robo-advisors) often offer year-round tax loss harvesting, but manual review can yield more strategic benefits.
Final Thoughts
Tax loss harvesting is more than a year-end tactic—it’s a smart, proactive way to reduce taxes and improve net returns over time. With careful planning, you can turn market downturns into long-term financial advantages.
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