Making the best out of a bad situation: How tax-loss harvesting can help your long-term investments
When the markets are volatile and your portfolio value has seen better days, there is one investment strategy that can actually benefit your portfolio and soften the blow.
Tax-loss harvesting
Tax-loss harvesting is the practice of selling of securities at a loss in order to collect a tax credit to offset realized capital gains. Although it cannot restore an investor to their previous position, it can significantly lessen the severity of the loss.
All it takes is 3 steps (watch our 3-minute webinar for a quick example):
- Sell an asset at a loss.
- Collect the tax credit.
- Buy a similar asset.
Note that tax-loss harvesting only makes sense for taxable accounts. In tax-sheltered accounts, such as a 401(k) or an IRA, this strategy does not have effect, since buying and selling assets in those accounts doesn’t have any tax consequences. In any case, you should always consult your tax accountant for specifics on how tax-loss harvesting applies to your situation.
There is only one catch: the wash-sale rule.
The SEC gives a pretty on-point description of what constitutes a wash sale. Here’s the gist of it:
If within 30 days before or after selling a security, you (or your spouse) invest in an identical or “substantially similar” security to the one you sold, it is considered a wash-sale.
If your tax-loss harvesting actions fall under the definition of a wash-sale, then the IRS will not allow you to use the loss to offset gains.
So how does one do this?
Use the right tools to help you
The difficulty in tax-loss harvesting is finding similar assets that will not trigger the wash-sale rule. Lucky for you, there are tools out there that can make this incredibly easy, so take advantage of them.
With AgentRisk Lite you can manage your portfolio for free and that includes rebalancing, optimizing and tax-loss harvesting. Or, if you prefer a completely DIY approach you can use our free tool to find similar assets to the one you want to sell.
For more details and information on tax-loss harvesting and wash sales, read IRS Publication 550.
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