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Tax Loss Harvesting

Tax Loss Harvesting

Tax loss harvesting is an investment technique that will assist you in controlling your taxes. The strategy utilizes realized losses to offset realized gains, and potentially a little bit of taxable income.

Who can take advantage of Tax Loss Harvesting?

Tax loss harvesting works with taxable investment accounts. These include brokerage accounts (often seen as TOD or Joint). Normally in these accounts, when you realize gains and receive dividends you pay taxes.

This strategy does not apply to retirement accounts, as they are taxed based on the funds going in (contributions) and coming out (distributions).

Example: An Account With $15,000 in Realized Losses, $10,000 in Realized Gains

These losses and gains have been “realized”, meaning you have sold the securities that have seen a loss or gain in value.

If you held these positions for less than one year, they are taxed at the ordinary income rate, or your marginal tax rate. If you hold the position for greater than one year, you’ll be subject to long term capital gains rates.

In our example, let’s just assume it’s a combination of positions that you’ve sold. Some of those positions were at a loss ($15,000 in our example) and some represented a gain ($10,000 in our example).

By tax loss harvesting, you’re going to be able to leverage the $15,000 of losses to offset the $10,000 in gains, so you can eliminate them and be leftover with $5,000 of losses.

There’s More

The good thing about the tax loss harvesting strategy is you can then use another $3,000 to offset your taxable income.

For example, if you have $100,000 in taxable income – you could now take $3,000 against that $100,000 making it so that your taxable income is only $97,000.

Carry Forward

You probably notice that means now you have $2,000 of losses that still haven’t been used. $15,000 – $10,000 – $3.000.

What happens with those losses? The good news is you can take those losses and carry them forward, indefinitely to 2021 and beyond. They can offset any future gains or future income, so make sure you keep records of how much you are carrying forward!

Why use this Tax Loss Harvesting Strategy?

Of course, we’re never hoping for losses with our investments. We invest to make money.

However, tax loss harvesting is important because:

  1. The market doesn’t care what you paid for your position. Buy and hold can be a great strategy, but you shouldn’t hold on to a position you’d otherwise rather not own just in hope of “breaking even”.
  2. The strategy allows you to actively manage your tax burden, with the potential to delay realizing gains in lower tax years.

Unless you want to hold onto a security in the long term, tax loss harvesting can assist you in getting the most bang for your buck when you want to get out of a security held in short term.

Have any questions? Contact us and I would be happy to help!

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