WTF (What the Finance?) is Tax Loss Harvesting?

Yep, your investments are down and so are your spirits.  Those looking for a silver lining may be talking about tax loss harvesting.  What does that even mean?

Warning, if your money is all in retirement accounts (IRAs, Roth IRAs, 401(k)s, 403(b)s, this concept doesn’t apply.  Tax loss harvesting is only for accounts where capital gains taxes are paid and capital losses can be written off.  Investment performance in retirement accounts is irrelevant to the tax treatment.  All withdrawals (a few odd exceptions) are taxed at ordinary income tax rates.

For those of you who have mutual funds or stocks or bitcoin that are in non-retirement accounts, listen up!  If you sell those securities at a loss and have other securities you still have gains in, the loss on one security could offset the gain on another.

You can sell some shares of, say, an S&P 500 index fund that are still at a gain and couple that with say, a newly purchased bond fund that is at a loss.  After 30 days (avoid the wash sale rule), you could re-buy the funds you sold at potentially a higher cost basis.  When you go to sell that security many years from now, your capital gains tax could be lower.

If you are engaging in tax loss harvesting, be aware of keeping your overall portfolio in the asset allocation you intended.  As we say in financial services, “don’t let the tax tail wag the investment plan dog.”

The nice thing about tax loss harvesting is that even if you don’t really dislike your investments that are down (after all, you are a mature investor and realize down markets happen), you can sell a down investments to relieve the tax burden of a profitable one, and buy something similar in the portfolio to keep your asset allocation in line.

Sound complicated?  It is!  But, you could get help from your brokerage company.  If you are paying an assets under management fee, it’s likely your advisor is doing this for you anyway.  Double check to be sure.

And worst, case scenario, for those with under $1,000,000 in non-retirement assets, tax loss harvesting probably isn’t critically important to your long-term financial success.  Constructing and sticking with a diversified low-cost portfolio is the more important action plan.



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