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Tax-Loss and Tax-Gain Harvesting

With year end in sight, it’s time to start considering where and how you can cut back on those taxes. One of the easiest ways to make your portfolio work for you is to take advantage of tax-loss and tax-gain harvesting.


Tax-Loss Harvesting


Tax-Loss Harvesting is really an opportunity for you to save some money on your taxes when we go through some stock market volatility.


Often when we get into taxes, people can over complicate things. I myself have a simple definition. Tax-Loss harvesting is the process of selling off an asset (stock or bond) that has experienced a loss, and taking that invested sum and returning it to the market in another vehicle 30 days after the sale. By selling the asset at a loss, you’re able to offset taxes from other investments.


After another 30-day period, you’re welcome to reinvest in that previous sold off asset, hopefully with a low purchasing price, and your portfolio will remain the same for 2019.


When it comes to tax-loss harvesting, the big concern is the wash sale rule. You cannot sell a security at a loss, and repurchase a similar investment within a 30-day period. Otherwise, it’s considered an “unrealized” loss, and therefore is illegal.


Tax loss impacts are a great opportunity to offset any gains in the market. Given how we’ve seen a lot of fluctuation in the markets over this past year, a lot of opportunity has been presented.


Also, tax loss impacts work together with the carry forward capital loss rules, which allow you to carry those losses forward on future tax return statements.


To sum it up, tax loss harvesting is a way of booking a loss but maintaining your position in that particular stock or mutual fund. If done correctly, it can really impact your tax payments.


Tax-Gain Harvesting


So if Tax-Loss harvesting involves selling your investments at a loss, I’m sure you can guess what tax-gain harvesting looks like.


Tax-gain harvesting is defined as selling your investments after they have appreciated in value. And now we’ve got new tax laws that make this a very strategic move.


Before 2018, capital gains taxes didn’t have their own brackets. Welcome to the new tax world. Now with the new tax law zero capital gains bracket, you’re able to experience a larger amount of gains before hitting a taxable amount (and that first tax bracket starts at 15%).


If you’re sitting in that comfortable 0% capital gains tax bracket, you can sell your gains, and immediately repurchase the same investment at a higher cost basis, and you won’t pay a penny in taxes for the privilege to do so. (Remember, wash sale rules don’t apply to the sale of gains).


This can be an effective long term planning tool, because if in the future that investment were to flop, you can now tax loss harvest on that same investment you tax gain harvested on for a higher loss amount, lowering your future taxes for years to come.


While it can be tempting to get started selling and repurchasing your gains, we need to cautious of the short term capital gains rates. Tax-Gain harvesting is not an advisable practice for any investments under a year old.


And one final word of advise, don’t get too sell crazy and bump yourself into a higher tax bracket (it would defeat the purpose of all your harvesting work!)


For more information on how you can begin to work your portfolio for taxation relief, be sure to contact your financial advisor, or Heller Wealth Management. We would be happy to help. 

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Larry Heller, Not Your Average Advisor.

 

A CFP® (Certified Financial Planner) and a former CPA.

Has helped solve complex financial planning for 20+ yrs.

Member of Wealth Management Think Tank.

A financial advisor think tank that meets monthly to discuss investment strategies and planning opportunities.

Larry is approached regularly by the respected journals.

“Journal of Financial Planning”, and “The Wall Street Journal”.