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Taking Advantage of Tax-Loss Harvesting

Taking Advantage of Tax-Loss Harvesting

December 11, 2023

Key Takeaways:

  • Tax-loss harvesting can help you turn investment losses into an opportunity, offsetting capital gains or current income.
  • There are subtleties associated with tax-loss harvesting that require careful attention if it is to be effectively implemented.
  • Collaborate with your advisor to maximize the benefits of tax-loss harvesting and ensure these efforts align with your long-term financial goals.

 

Introduction

Encountering losses in your investment portfolio can be frustrating, but there's a silver lining. Astute investors can turn these losses into opportunities through tax-loss harvesting, offsetting current income or future gains and making the most of a challenging situation.

 

What is Tax-Loss Harvesting?

Tax-loss harvesting is an investment strategy to minimize taxes by selling underperforming assets. The goal is to use realized investment losses to offset income or taxable gains realized elsewhere.


How Does It Work?

When an investment incurs a loss, investors can sell these assets to offset capital gains or reduce taxable income. The first step is to realize the loss, which involves selling the position that has fallen in value. Realized losses may then be used to…

  1. Offset Capital Gains: Use losses to offset gains in the same tax year.
  2. Offset Current Income: Excess losses can offset current income, up to $3,000.
  3. Carry Forward Losses: Any remaining losses can be carried forward to future tax years.

 

This strategic approach not only mitigates losses but optimizes the overall tax efficiency of the investment portfolio. By carefully managing transactions, investors can navigate market fluctuations while aligning with long-term financial goals. Working closely with your advisor ensures adjustments remain in line with your unique strategy and risk tolerance.

 

What are the Benefits?

  1. Maximize Tax Efficiency: Tax-loss harvesting significantly minimizes current-year tax liability, ensuring a larger share of gains remains untaxed. This process maximizes after-tax returns.
  2. Boost Long-Term Wealth Accumulation: Consistent tax-loss harvesting compounds returns, contributing to long-term wealth accumulation. Reinvesting tax savings strategically accelerates overall portfolio growth.
  3. Manage Risk Effectively: Beyond tax advantages, the strategy can serve as a risk management tool. Regular portfolio reviews and seizing tax-loss opportunities can help reduce concentrated positions over time, lowering portfolio risk.

 

Be Careful!

While tax-loss harvesting offers benefits, navigate nuances carefully. Wash sale rules disallow losses if a security is repurchased within 30 days. Oftentimes, investors seeking to harvest tax losses on a given position in their portfolio will purchase a similar security before repurchasing the original position 31 days later. However, the replacement investments must not be too similar, or they could be considered substantially identical securities under IRS rules. It is also important to monitor transaction costs, properly offset short- and long-term gains and losses, and consider the timing of dividend payments and capital gains distributions.

 

What About 2023?

In 2023, despite broad U.S. large-cap stock indexes rising, some market segments have experienced downturns. Differentiated returns between asset classes provide chances to offset losses and maximize gains. No two portfolios are exactly alike, so the opportunities for tax-loss harvesting will vary by client. Consult with your advisor to determine what opportunities exist to implement tax-loss harvesting in your portfolio.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its
representatives may give legal or tax advice.