Whether you’re a seasoned investor or new to investing, tax loss harvesting offers a way to make market volatility work in your favor. Let’s dive into how tax loss harvesting works and how it can benefit your investments.

Tax loss harvesting involves selling investments that have decreased in value to realize a capital loss. This loss can then offset your capital gains—those profits you’ve made by selling other investments at a higher price. If your losses exceed your gains, you can even use up to $3,000 annually to reduce your ordinary income and carry any remaining losses into future years.

Tax loss harvesting isn't just about cutting your losses; it’s about being strategic with your portfolio, ensuring you benefit from market fluctuations while staying aligned with your long-term financial goals.

When Should You Consider Tax Loss Harvesting?

This strategy works best when the market is experiencing a dip or some of your investments aren't performing as expected. However, it isn’t something to do only at year-end. Monitoring your portfolio periodically throughout the year for potential harvesting opportunities can help you maximize the impact.

The key is to look for investments that no longer fit your objectives or are underperforming relative to your expectations. But don’t worry—tax loss harvesting doesn’t mean you abandon your plan or stay out of the market. We’ll explore replacement strategies next to keep your portfolio on track.

Avoiding the Wash Sale Rule

One of the most important things to know about tax loss harvesting is the wash sale rule. The IRS prohibits you from claiming a tax loss if you repurchase the same or a "substantially identical" security within 30 days before or after selling it. This rule ensures that investors don't sell an asset purely for tax reasons and immediately buy it back.

To avoid the wash sale rule, we can replace the investment you sold with something similar but not identical. For example, if you sell a tech mutual fund at a loss, we could replace it with another technology-focused fund with a slightly different composition.

Benefits Beyond Tax Savings

Tax loss harvesting isn't just about reducing taxes; it also helps in rebalancing your portfolio. When we sell certain investments at a loss, it gives us a chance to reinvest in other opportunities that may better align with your goals.

Additionally, harvesting losses can smooth out the impact of capital gains taxes when you sell higher-performing assets. This can be particularly helpful during years when you have a big capital gain, such as from selling real estate, a business, or a concentrated stock position.

Who Benefits Most from Tax Loss Harvesting?

Tax loss harvesting works well for many investors, but it’s especially beneficial for those in higher tax brackets because it reduces taxable income more meaningfully. If you are nearing retirement or expect your income to drop in the future, this strategy could help you lower your tax bill during your high-earning years.

It’s also a great strategy if you regularly rebalance your portfolio or plan to gift highly appreciated stocks to heirs. By strategically harvesting losses, we can keep your portfolio tax-efficient while still giving you room to reach your financial goals.

Let's Talk About Your Strategy

If you’re interested in exploring tax loss harvesting or have questions about how it fits into your financial plan, contact Mark Vergenes to review your portfolio. With the right approach, we can turn market downturns into opportunities and ensure your investments are working as efficiently as possible.

Remember, tax laws are complex and change often. That’s why it’s crucial to work with a financial professional who understands how to balance tax strategies with your broader financial goals.

The information provided in this article is for educational and informational purposes only and should not be considered as financial, tax, or legal advice. Investing involves risks, including the potential loss of principal. Past performance is not indicative of future results, and no strategy guarantees success or avoids loss in every market environment.

While tax loss harvesting can be a useful strategy, individual tax situations vary, and the tax implications of any investment decision should be carefully evaluated. We recommend consulting a certified tax professional or CPA to ensure compliance with current tax laws and to better understand how this strategy applies to your specific circumstances.

This article reflects the perspective of a financial advisor, not a tax professional. Please remember that financial advisors are not licensed to offer tax or legal advice.