Tax-Loss Harvesting

Tax-loss harvesting is selling your assets that have a loss for the year so that the loss is realized. People typically use this strategy as part of their end-of-year income tax planning; however, with the recent changes to the tax code and market volatility, you may want to start thinking about it now. Tax loss harvesting may allow you to offset your taxes on both gains and income.
Why do tax-loss harvesting?
When looking to rebalance your portfolio, you’ll likely have some assets that are up and some that are down. As you’re selling your appreciated assets—which will result in a taxable gain—you may also want to consider selling your “down” assets. Selling the “down” assets will result in a loss that could offset the gain. If you already have a diversified portfolio, the sold security may replace a similar one, allowing you to maintain an optimal asset allocation.
The goal is to reduce your income tax bill—but you have to pay attention to the type of loss you have. Short-term losses are assets held for a period of less than 12 months that result in a short term gain or loss when sold. Long-term losses are assets sold after being owned for 12 months or more that can result in a long term gain or loss. 
 
In calculating the income tax consequences of selling assets, short- and long-term gains/losses are determined separately, but on a net basis. The net short-term gains/losses are then combined with the net long-term gains/losses to determine the amount that will be subject to income taxes or that may be used as an offset to other income.
Consider the following example:
 
Stock A purchase cost — $1,000   
Stock A current value — (500)
Loss upon sale — 500
 
Stock B purchase cost — $1,000
Stock B current value — 1,500
Gain upon sale — 500
 
The $500 loss on Stock A is used to offset the $500 gain on Stock B, resulting in no tax liability.
A word of caution
Before putting a tax-loss harvesting strategy into place, it’s wise to remember the “wash sale” rule. The “wash sale” rule states that if you sell a security at a loss and then purchase a “substantially identical” security within 30 days prior to or after the sale, the loss is disallowed for income tax purposes. 
 
The “wash sale” rule also applies to sales of assets held in a tax qualified retirement plan and to sales among spouses. You can’t sell an asset at a loss in a taxable account and then purchase that same security (or a “substantially identical” one) in your retirement account. Nor can one spouse sell at a loss and the other spouse purchase a “substantially identical” security within 30 days prior to or after the sale. Losses in both of these scenarios will be barred by the “wash sale” rule.
 
For questions about tax-loss harvesting, contact your Wealth Management Advisor or Portfolio Manager.
This material is for general informational purposes only. It is not intended to be used, and cannot be used, as a substitute for specific individualized legal or tax advice. Additionally, any tax information provided is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties. Tax and other laws are subject to change, either prospectively or retroactively. Individuals should consult with a qualified independent tax advisor, CPA and/or attorney for specific advice based on the individual’s personal circumstances. Examples included in this presentation, if any, are hypothetical and for illustrative purposes only.
 
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