In this Let’s Get Personal post, we'll explore a powerful tool in the investment world: Tax Loss Harvesting. As a savvy investor, you're always looking for ways to maximize your returns and minimize your tax bill. Tax Loss Harvesting is one strategy that can help you do both.
First, let's define what Tax Loss Harvesting is. It's a technique where you intentionally sell securities at a loss in your taxable investment account to offset capital gains elsewhere in your portfolio. The idea is to use those losses to reduce your overall tax liability. You then reinvest the proceeds in a similar but not identical security to maintain your overall portfolio's desired asset allocation and market exposure. So, how does tax loss harvesting work? Essentially, you sell investments that have decreased in value, which generates a loss. You can use these losses to offset capital gains from other investments, reducing the amount of tax you owe. If your losses exceed your gains, you can use up to $3,000 per year to offset ordinary income, and any remaining losses can be carried forward to future years.
The benefits of Tax Loss Harvesting go beyond just reducing your tax bill. It can also improve your overall investment returns. By selling securities at a loss, you're essentially harvesting those losses and using them to buy similar, but not identical, securities. This allows you to maintain your desired asset allocation and market exposure while realizing a tax benefit. And if the new securities you buy perform well, you'll benefit from those gains as well.
There are a few things to keep in mind when implementing a tax loss harvesting strategy. First, it's important to stay diversified and not sell off too many investments in one asset class. Second, you need to be aware of the wash sale rule, which prohibits you from buying back a "substantially identical" investment within 30 days of selling it. Finally, it's important to work with a financial advisor (preferably us) who can help you implement the strategy properly and ensure that it aligns with your overall financial plan.
At ELEMENT, we understand the importance of tax-efficient investing, and tax loss harvesting is just one of the strategies we use to help our clients maximize their returns and minimize their tax bills. If you're interested in learning more about this strategy and how it can benefit you, don't hesitate to reach out to our team.