If you lost out on some of your investments this year, you may find yourself asking, “How does tax-loss harvesting work?”, “Do I need tax-loss harvesting?”, or maybe you’re even asking what tax-loss harvesting is to begin with.
Tax-loss harvesting is a financial strategy that has the potential to help reconcile investment loss, offset capital gains taxes you owe, and/or minimize taxes owed on your taxable income. In this article, the wealth managers from Avidian Wealth Solutions walk you through what tax-loss harvesting means and whether it is necessary for your personal strategy.
What is tax-loss harvesting?
Making money on some investments while losing out on others is a natural part of investing –– and in some cases, like with tax-loss harvesting, can actually work to your advantage. Tax harvesting is one of many high-income tax strategies that takes advantage of realized losses, or the loss that is realized when you sell an asset for lower than you originally purchased it for, in order to offset a higher gain or taxable income. These assets can include stocks, mutual funds, and exchange-traded funds (ETFs).
Although this can be a great strategy to reduce the tax-drag on your portfolio performance, it must be implemented correctly. We recommend speaking with an advisor before trying to utilize capital losses on your own.
How do you benefit from tax-loss harvesting?
As previously mentioned, the biggest potential benefit from tax-loss harvesting is a reduction in that year’s tax obligation. Not to mention that the actual act of selling both high and low performing assets gives you the opportunity to rebalance your portfolio by reinvesting the funds from both sales.
Do I need tax-loss harvesting?
In other words, is tax harvesting worth it? The answer isn’t so straightforward and may depend on the tax laws for that year. For some investors, specifically high-earners, tax-loss harvesting can result in a huge tax benefit and can be a great strategy to rebalance your portfolio. On the other hand, depending on your long-term plan, investments, and realized losses/gains, you could end up paying more in taxes down the road. Especially if you end up re-buying the assets that you sold. In these cases, there may be other high-net-worth investing strategies that are better suited to your financial needs.
How to implement tax-loss harvesting strategies
Before we go into the how-to’s, we do want to advise that you consult with your financial advisor to establish the best tax strategy for you. They can work with you to develop a plan that leverages the proper tax strategies — with consideration to other aspects of your financial plan — to minimize your tax burdens across multiple areas.
Tax harvesting is an investment management strategy that can, and should, be applied throughout the year. When evaluating your current portfolio for potential opportunities, you’ll want to first assess investments that are performing poorly, no longer align with your goals or personal finance allocation, or that throw your portfolio out of balance. For instance, if the healthcare stocks you own have significant value while your energy stocks have dropped.
After selling the selected investments, you’ll need to decide where to reallocate the funds if you choose. Keep in mind that you may not buy the same security or similar security for 30 days before or after the sale of your other stock. This is considered a wash-sale and will disallow your tax break.
To realize capital losses, you’ll need to make the sale by the end of the year and also complete Form 8949 and Schedule D.
Tax-efficient wealth management from Avidian Wealth Solutions
Now that we have answered the question, “How does tax-loss harvesting work?”, we hope that you will consider it a valuable part of your financial strategy. As with any tax strategy, tax-loss harvesting can come with some major benefits including the opportunity to save on taxes for that year. However, if not done properly, you could end up paying more in the long run. This is one of the many reasons why working with an advisor can be beneficial.
As a fiduciary wealth management firm, Avidian Wealth Solution has a legal obligation to act in your best interests, working alongside high-net-worth businesses, individuals, and families to create financial strategies that preserve their hard-earned wealth. Outside of tax planning, we offer complete wealth management services including retirement planning, risk management, estate planning, and investment management in Houston.
If you’re interested in learning more about how we can help you achieve your financial goals, request a meeting today.
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