As year-end approaches, tax planning becomes top of mind for many investors. One of the most popular strategies to implement is tax-loss harvesting. Tax-loss harvesting involves selling positions in a non-qualified account (i.e individual, joint) at a loss, and using that realized capital loss to either offset realized capital gains and/or offset up to $3,000 in ordinary income. Before 2022, finding positions to use with this strategy was difficult, as investors experienced one of the longest bull runs in history. However, with most markets down between 15-20% through the first 10 ½ months of the year, opportunities are plentiful.
To highlight the tax savings this strategy can offer, let’s walk through a hypothetical example. Suppose you have a portfolio of 10 stocks, you are in the 35% tax bracket and all positions in your portfolio have been held for less than a year (assets will get ordinary income tax treatment vs. the more favorable capital gain treatment). You want to sell 2 of your positions and reallocate your portfolio. One of the positions you want to sell has an unrealized gain of 25,000, while the second position has an unrealized loss of $30,000. If you were to only end up selling the one position that has appreciated, realizing the $25,000 capital gain, you would be faced with an $8,750 tax liability ($25,000 x 35%). However, if you subsequently sold the position that had lost value, realizing a $30,000 loss, you could offset the entire $25,000 gain (which would save you $8,750), use $3,000 of your excess losses to offset $3,000 in ordinary income, which would save you $1,050 ($3,000 x 35%) and then carryforward the unused loss of $2,000 indefinitely. This strategy would ultimately save you $9,800+!
Limitations
One thing to keep in mind is the wash sale rule – which states you cannot rebuy a “substantially identical” investment within a 30-day window before or after the sell or the loss is disallowed.
When it comes to financial matters, it is hard to find something more satisfying than saving money on taxes. While this strategy is not extremely complicated, it all comes down to execution. The main goal of advisors at LeConte Wealth Management is to give our clients peace of mind, and for them to know that we have their back in every financial matter. A strategy such as tax-loss harvesting perfectly demonstrates this. Has your advisor discussed this tax planning strategy with you?
