One way to help boost returns without incurring any extra risk is called tax harvesting, which sounds a lot more difficult than it truly is. Simply put, it is the sale of securities at a loss in an effort to offset your capital gains liability.
When Is Tax-Loss Harvesting Most Likely to be Used?
While it may be beneficial at any time during the tax year, it is most often utilized during the end of the calendar year or during an unusually volatile time in the markets such as March and April of 2020. The process involves selling an investment with an unrealized loss which will credit against the capital gains in the portfolio. The investment that has been sold is then replaced with a similar investment to re-balance the portfolio asset allocation.
Tax-loss harvesting might be beneficial to anyone who has their savings in an account that is taxable. The investor will want to look at investments that have lost money and been held for less than a year to enjoy the greatest benefit. The investment is sold, thereby creating a taxable loss. If there are gains on the portfolio, it will help to offset them, and if not it may still lower the overall tax payment.
Tax Harvesting Considerations
There are a few things to take into consideration for tax harvesting when selling a position that has lost value. If the capital losses in a portfolio exceed the gains by the conclusion of the year, then the losses may be used to offset up to $3,000 of any income that is non-investment as well. Additionally, losses that exceed $3,000 might be carried forward to offset capital gains and income in the future.
When done properly, tax harvesting may result in a significant reduction in tax liability at the end of the year for investors who have the ability to unload losing stocks before the close of the calendar year.
To learn more about this strategy – as well as other timely financial planning strategies – read this article or watch our educational video below:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Asset allocation does not ensure a profit or protect against a loss.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.