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Give Yourself The Gift of Tax-Loss Harvesting This Holiday Season!

roth conversion tax loss harvesting taxes Dec 05, 2022

Are you feeling a little down about your investments lately? If so, this will help turn that frown upside down.

In this article, we will discuss tax loss harvesting and how it can help turn "paper" losses into tax-free gains.

Often, when we make investing decisions, we are focused on maximizing our earnings and minimizing risk. But sometimes, market conditions can result in losses for our investments, leaving us feeling frustrated and dejected.

Fortunately, tax loss harvesting is a strategy that can help turn those losses into tax-free gains. This involves selling an investment at a loss, then using those losses to offset any capital gains you may have.

If you do this strategically and regularly, you can significantly reduce your tax liability while still maintaining a robust and growing investment portfolio.

What is Tax Loss Harvesting?

Tax loss harvesting is a strategy used by investors to turn losses in their investment portfolios into tax-free gains. It involves selling investments at a loss, and then using those losses to offset any capital gains you may have, now or in the future.

Of course, we don't want to lock in those losses. So to ensure we participate in the markets recovery, we purchase "different" securities.

For instance, if we are selling an ETF of the S&P 500, we might buy a "value" ETF of the S&P 500. Or we might purchase the individual sectors of the S&P 500. In this way we don't trigger the "wash sale" rule.

Beware of Wash Sales

One thing to keep in mind when using tax loss harvesting is the wash sale rule. This states that you cannot take a tax loss on an investment if you buy "similar" securities within 30 days of selling it.

So, for instance, if you sell an ETF tracking the S&P 500 at a loss, but then purchase options on the S&P 500, the IRS considers it as if the original sale never happened. This means that we need to ensure that the new security we purchase is not "substantially" similar to the one we sold.

With careful planning and attention, however, tax loss harvesting can be a great way to turn those paper losses in to actual dollars off your tax bill.

Beware of Settlement Times

Another thing to be aware of when using tax loss harvesting is the settlement time of your securities.

For instance, if you sell a stock at a loss, generally speaking your brokerage account won't let you re-invest until your funds have settled. This can mean that you will miss out on market gains for a short period of time, so be sure to keep this in mind when deciding if tax-loss harvesting is right for you.

(P.S. This is another reason why rich people love debt. They will have margin on their accounts which will allow them to "borrow" money to buy in to the market while their funds settle. This all happens seamlessly for them.)

Using Tax Loss Harvesting in Your Retirement Accounts

Ordinarily you can't tax-loss harvest in your retirement accounts, since you don't pay taxes until you withdraw money from your accounts. However...

A great strategy for reducing the cost of your Roth Conversions is to convert depreciated securities. This gives you an immediate discount on your conversion (since conversions are taxed based on their "fair market value.")

Turning "Paper" Losses In To Tax-Free Gains!

Bottom line, tax loss harvesting can be a great way to turn those losses in your investment portfolio into tax-free gains. But it is important to be aware of the wash sale rule, and market timing if you don't have access to margin on your account. With careful planning and attention, however, tax loss harvesting can help you save money on your taxes while still keeping your investments growing strong.

Wondering if tax-loss harvesting is right for you? Let our team do a free Tax SWOT analysis. We'll look at your accounts and uncover your hidden tax saving opportunities, including: tax-loss harvesting, Roth conversion, and more. So why wait? Contact us today and let's start saving you money on your taxes!

Give yourself the gift of tax-loss harvesting this holiday season, click here to get started!



*** This article is not a comprehensive discussion of the topic. Make sure to speak with a tax professional before implementing any tax-loss harvesting strategies. ***

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