Benjamin Franklin advised, “Don’t put off until tomorrow what you can do today.” This adage feels particularly applicable to the current environment which is presenting a great opportunity to defer taxes in taxable accounts by harvesting losses.
Tax-loss harvesting is the process of deliberately selling investments at a loss – taking a capital loss – in order to offset gains realized from other investments either in the current year or in future years. It’s essentially a strategy that may help reduce your tax liability.
While the term itself can sound daunting to some making it easy to ignore or overlook, tax-loss harvesting can really benefit anyone who has assets invested in a taxable account — regardless of the size of their portfolio. The only caveat is that tax-loss harvesting can be applied to taxable accounts only, not to tax-deferred accounts, such as an IRA or a 401(k).
Selling an investment at a loss can therefore provide significant tax benefits. For example, if a client has an investment that has lost money due to a market downturn like we have experienced this year, that investment can be sold and the loss used to reduce any taxable gains occurred on other investments in the client’s portfolio. The IRS even allows losses (up to $3000/year) to be deducted from your ordinary income. Any unused capital losses are rolled over to future years with no “expiration date”.
Trust the Process
The nice thing about working with a company like Trust Point is that tax-loss harvesting is a part of our normal investment review process. Throughout the year, we look for those opportunities for you and identify specific taxable accounts where tax-loss harvesting makes sense. Throughout the process, we will typically look at achieving a net zero capital gain for the year.
We also make sure to comply with the “wash sale rule” which states that a loss cannot be realized for tax purposes if a substantially identical position was bought within 30 days before or after the sale. We typically comply with the rule by immediately reinvesting the proceeds from the investments sold at a loss into equivalent passive investments and will return to the primary investments after 31 days unless short-term gains are prohibitive.
Help us make this year a great tax-loss harvesting year
This year, the decline in markets has provided a unique opportunity to not only seek a net zero capital gain for the year, but harvest losses above and beyond that target to either offset capital gains generated from other sources in the current year or anticipated in future years as once again carryover losses don’t have an “expiration date”.
Here is the key takeaway:
If in 2022 you have completed (or are anticipating to complete in future years):
- the sale of a business(es)
- the sale of a real estate property(ies)
- the sale of a secondary home(s)
- the sale of any other investment assets(s) in taxable accounts outside of Trust Point
- the sale of any other type of capital asset(s) at a gain
AND…
You would like to discuss with us how we could potentially help you minimize taxes by maximizing losses in your taxable accounts here at Trust Point, please consult your relationship manager to coordinate a meeting as soon as possible. We will work closely with your tax professional to determine if tax-loss harvesting is right for you.
Our goal is to make it as easy as possible for our clients. This is just one example where our expertise is your financial advantage.
