As December 31 approaches, you – or your investment advisor – should review taxable investment accounts for “tax-loss harvesting” opportunities.

 

Tax-loss harvesting is an important -- but often neglected -- year-end investment strategy. It refers to selling investments that declined in value, which generates capital losses. The IRS doesn’t recognize losses unless you sell the asset.

 

Those losses are then used to offset capital gains on your tax return. That reduces the taxes you pay and, if losses exceed capital gains, up to $3000 can be used to reduce ordinary income on your tax return.

 

The cash proceeds from the sales can be

If you reinvest in identical or substantially identical investment in less than 30 days, you can’t take the deduction.

 

Example: In your taxable account, investment A was recently sold and generated $10,000 in capital gains. In order to avoid paying those taxes, you sell investment B, an international index mutual fund, for a $13,000 loss. The proceeds from the sale are reinvested into an international actively managed mutual fund, so your market exposure stays basically the same.

 

For that year's taxes, $10,000 of the $13,000 loss in B offsets the capital gain from A. Result, no taxes are due on the capital gain from A. The remaining $3000 in losses can be deducted against ordinary income, reducing taxes another way.

 

The IRS places many limits on this, so you need to proceed carefully. I am not authorized to give legal or tax advice. Consult your tax advisor regarding any tax implications and your attorney for legal implications. Your unique circumstances must be considered before applying general investment strategies to personal finance. This information is provided for discussion purposes only and should not be considered as investment advice. This information is not a recommendation to buy or sell securities.

 

Please let me know if you have any questions.

Notes:

This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.

Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.

• Past performance is no guarantee of future performance;
• Investments involve the risk of loss of principal and earnings;
• ETFs, mutual funds, including money market funds, etc. are not guaranteed in any way by the US Government, the FDIC, a bank or anyone else.
• “Average annual return” evens out variations in the actual year-to-year returns.
• ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
• None of the information provided by Arthur Stein is necessarily relevant to anyone’s particular situation. Situations differ among individuals and you should not assume that these generalizations or information apply to you.
• Investments mentioned may not be suitable for all investors.