Tax-Smart Strategies: Can You Take Advantage of Tax-Loss Harvesting?

Tax-loss harvesting has the potential to turn paper losses into real, deductible losses for tax purposes. In this blog post, which is part of a four-article series on tax-smart strategies, we will look at whether this could be an option for you.

Tax-loss harvesting, which is also known as tax-loss selling, is a strategy that investors use in taxable accounts to take a loss on one investment in order to claim a credit against the profits that were realized from the sale of another investment.¹

Let’s walk through a hypothetical example:

Imagine that you had the foresight to buy 100 shares of well-known technology company back in 2016 at $100 per share, and you sold them at $500 per share in 2024. Great trade, but since you just made a $40,000 profit (i.e., a $400 gain for each of your 100 shares), you could have a massive capital gains tax bill coming due.

Now, imagine that you had also purchased $100,000 worth of a particular ETF in 2021, and it had declined 40% in value by some point in 2024. This ETF may be a long-term investment that you had originally intended to hold indefinitely, but this is where tax-loss harvesting comes in.

Before the end of 2024, you could have sold the ETF in order to realize a capital loss of $40,000, which you could use to offset your $40,000 taxable gain on the technology company. Then, at a minimum of 31 days later (in order to avoid the IRS “wash sale” rule described below), you could buy the same or a similar ETF, if you wish, to restore the original composition of your portfolio.

Maximize your tax-loss harvesting

The ability to reduce or erase realized gains can be nice, but there are a number of items that could be important to keep in mind in order to execute this strategy properly:

• Carefully calculate your gains and losses. When you sell an investment, the difference between the adjusted basis and the amount you realized from the sale is either a capital gain or a capital loss. If your losses outweigh your gains, you may be able to apply some of the excess to further reduce your income, or you will have it available to carry forward to future years.²

• Avoid the wash sale rule. As mentioned above, when performing tax-loss harvesting, you will need to wait at least 31 days before buying back the original position or a substantially similar investment. This is to honor the wash sale rule, which would nullify the original tax loss and defeat the purpose of this strategy.³ If you wish to remain invested while you wait for this period to pass, it may be helpful to talk to your Corient Wealth Advisor about different security allocation strategies that could provide similar returns without falling under the punitive wash sale rule. You can find more information about this rule here: https://www.wsj.com/buyside/personal-finance/wash-sale-rule-3e914d9e  

• Work with your advisors. Virtually every tax strategy involves some complexity, and tax-loss harvesting is no exception. Not only must you play within the bounds of the tax rules, but you may also wish to be strategic about the amount and the timing of your gains and losses, security selection and portfolio construction. For example, to help offset a taxable capital gain, it might be tempting to sell one of your portfolio holdings that’s now in a capital-loss position, but what if this holding appears poised for a significant rebound? Tax-loss harvesting to lower your current tax obligation could be at odds with your overall investment strategy and impede your efforts to grow long-term wealth. For this reason, we believe it’s essential to consult your Corient Wealth Advisor and your tax advisor for assistance.

Tax-loss harvesting can be a useful tool for reducing overall taxes. In many cases, a loss in the value of “Security A” can be realized to offset the capital gains tax liability of “Security B.” Speak with your Corient Wealth Advisor about whether this strategy makes sense for you.

Other articles in this series

• Are You Maximizing Tax-Advantaged Accounts?
• Why Consider a Roth IRA Conversion Now?
  
• Is Now a Good Time to Give Financial Gifts?

¹ https://www.investopedia.com/terms/t/taxgainlossharvesting.asp
² https://www.irs.gov/taxtopics/tc409#:~:text=Topic%20No.%20409%20Capital%20Gains%20and%20Losses.%20Almost,is%20a%20capital%20gain%20or%20a%20capital%20loss
³ https://apps.irs.gov/app/vita/content/10s/10_04_011.jsp?level=

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