Tax-loss harvesting helps investors minimize their tax liabilities, optimize their portfolios, and enhance long-term financial growth by strategically managing losses. This is especially helpful in a down market. But what is tax-loss harvesting and how does it help me?  Keep reading…

What Is Tax-Loss Harvesting?

Tax-loss harvesting is the process of selling investments at a loss to offset gains elsewhere in your portfolio. This strategy can reduce your taxable income and lower your overall tax bill. The proceeds from the sale are typically reinvested into similar, but not identical, assets to maintain portfolio exposure while complying with IRS regulations.

How Tax-Loss Harvesting Works

Consider this scenario: You originally purchased an investment for $50,000, but its current market value has declined to $35,000. By selling at a $15,000 loss, you can use that loss to offset capital gains from other investments. If your capital gains for the year amount to $10,000, tax-loss harvesting allows you to offset the entire gain, leaving you with no tax liability on that amount. Additionally, any remaining loss (in this case, $5,000) can be carried forward to offset future gains or even reduce taxable income, subject to IRS limits.

Tax-Loss Harvesting Rules & Considerations

While tax-loss harvesting offers significant advantages, it’s important to follow IRS guidelines:

• Wash-Sale Rule: The IRS prohibits repurchasing the same or a “substantially identical” investment within 30 days before or after the sale. To stay compliant, investors can select alternative assets with similar market exposure but different structures.
• Carryforward Benefits: If losses exceed gains, up to $3,000 can be deducted against ordinary income per year, with any remaining losses carried forward indefinitely.
• Applicability: Tax-loss harvesting applies only to taxable accounts and does not benefit retirement accounts such as IRAs or 401(k)s.

The Long-Term Benefits of Tax-Loss Harvesting

• Tax Efficiency: Reducing taxable income over time leads to lower tax bills and greater investment growth potential.
• Portfolio Rebalancing: This strategy allows investors to readjust their portfolios while simultaneously benefiting from tax advantages.
• Compounding Growth: Reinvesting tax savings can enhance long-term wealth accumulation.

Is Tax-Loss Harvesting Right for You?

Not all investors will benefit equally from tax-loss harvesting, as its effectiveness depends on individual tax situations and portfolio structures. It is essential to evaluate the potential advantages and consult a financial advisor to determine whether this strategy aligns with your broader financial goals.

At ACap Advisors & Accountants, we specialize in creating tax-efficient investment strategies tailored to each client’s financial situation. If you’re interested in optimizing your portfolio through tax-loss harvesting, we encourage you to reach out to our team to discuss your options.