A version of this article appears in the November 2017 issue of Southside Living magazine.
The end of the year is an excellent time to look over your entire financial picture; specifically, your taxable investments. This gives you the opportunity to consider an often-overlooked strategy to save money on taxes through a process known as tax-loss harvesting.
To realize these potential tax savings, investors first need to check if their taxable investment portfolio has any security positions with unrealized losses. If it does, then they could benefit from tax-loss harvesting.
Look for significant downturns in the market that may affect any of your security holdings. For example, if the international equity markets had experienced considerable volatility this past year, that may have resulted in loss opportunities if you’re holding international or emerging market investments. In this example, you could sell those securities that have realized a loss and then purchase different, but similar investments. Take these realized investment losses and offset them against realized investment gains.
To maintain the integrity of your investment strategy, it’s necessary to purchase a suitable replacement position when selling an investment to harvest a tax loss. Despite going through a down-market cycle, they may still be good investments for your portfolio, but replaced with like investments. There’s another reason to replace with comparable investments, too: the market could turn around during the 30-day wash sale period, which prevents you from selling these positions and then immediately buying them back just to capture the losses.
A Material Benefit
Due to short-term market fluctuations and transaction costs, losses should only be harvested when they’ll produce a material benefit. Generally, harvest losses only when the loss is:
- At least 10% of market value of the security
- Significant enough to overcome transaction costs
Whether you do tax-loss harvesting by yourself or benefit from it as a value-added service from your advisor, do your homework and manage the net capital gains you’ve taken for the year, then offset as much of these with unrealized capital losses. Implementing this tax-loss harvesting strategy and taking the time to rebalance your investment portfolio throughout the year—not just at year-end—will help keep your taxable portfolio fiscally fit.
We’re Here to Help
If you have any questions or would like to better understand how tax-loss harvesting could potentially benefit your investment portfolio, contact your Moss Adams professional.