When it comes to wealth management, the greatest thief isn’t a market crash or a bad stock pick; it’s complacency.
When we get complacent, we get lazy. We close ourselves off to new ideas and new ways of thinking. We get stubborn and fixated on a concept that may have worked five years ago.
You deserve today’s best strategies, the best ideas, and the “same old, same old” just isn’t cutting it anymore. It’s time to optimize and future-proof.
So, as everyone is thinking about the fall and harvest, we aren’t thinking of apple picking and pumpkin spice lattes. We are thinking about another kind of harvesting: Tax-Loss Harvesting.
What is Tax-Loss Harvesting (and Why It’s Not Just for Bad Years and Bad Apples)
Tax-Loss Harvesting is a powerful, proactive strategy that can help you offset capital gains and reduce taxable income. By strategically selling investments that have lost value, you can use the losses to offset gains from other investments. Consider these elements:
1. Identify Underperforming Assets: Review your taxable brokerage portfolio and pinpoint investments or specific tax lots that have decreased in value since you purchased them.
2. Sell at a Loss: Sell the underperforming assets to formally realize the capital loss.
3. Offset Gains: Use the realized losses to offset capital gains from other investments that you sold for a profit this year (or will sell before year-end).
4. Reduce Taxable Income: If your total capital losses exceed your total capital gains in a given tax year, you can use up to $3,000 of the excess losses to offset your ordinary income annually. Any remaining losses can be carried forward indefinitely to offset future gains.
5. Avoid the Wash Sale Rule: Crucially, be mindful of the wash sale rule, which prevents you from repurchasing the identical or a “substantially identical” security within 30 days of selling it at a loss.
The Paradox: Creating Losses in a Profitable Portfolio
This is where the complacency thief is most active. Many investors whose portfolios are “up big” for the year assume they have no losses to harvest. They are wrong.
Even in a profitable portfolio, you may have some losing positions, because markets are never perfectly uniform. While your total portfolio might be up 15%, you likely have:
1. The Lagging Asset Class: Your portfolio is diversified, which means not all asset classes are performing well at the same time. While U.S. large-cap tech stocks might be booming, your international stocks, emerging market bonds, or real estate investment trusts may be down.
2. The Losing “Tax Lot:” This is the most common and overlooked opportunity. An investor may have purchased Stock X multiple times over the past two years:
· Lot A: Purchased at $50 (now at $80) Big Gain
· Lot B: Purchased at $90 (now at $80) Small Loss
Even though Stock X is one of the biggest winners in your portfolio, you can choose to sell only Lot B. You realize a tax loss from the sale of Lot B, but you still hold most of your successful position (Lot A), and the overall position is still profitable.
3. The Rebalancing Trigger: Smart investors rebalance their portfolios regularly to manage risk and maintain their target asset allocation. Rebalancing often means selling winners and buying losers. To maintain your strategic asset allocation, you might need to sell some of your appreciated stock positions to reduce its weight. Instead of waiting for a single large capital gains event, use a harvested loss from another position to offset it, making the rebalancing transaction tax-free.
Get Proactive
Tax-loss harvesting is no longer a complicated year-end scramble. It’s an “always-on” strategy that should be executed throughout the year, especially during periods of market volatility, not just when your portfolio is down. By strategically managing your portfolio to include small potential losses, you may be able to offset gains.
It is time to challenge yourself and your various advisors to explore new ideas. It is time to get out of the rut and consider new, proactive strategies.
Don’t be complacent, be optimized. Windes Wealth Management will work with you and review your portfolio for opportunities to help you optimize your investment strategy and offset capital gains.