Tax-loss harvesting is the practice of buying and selling in a portfolio with the goal of reducing the tax consequences of investing. For example, an investor may sell an investment at a loss simply to offset the gains from another investment. Here are three things to keep in mind with tax-loss harvesting:
First, the problem with tax-loss harvesting is that it can mean selling a holding that may be good in the portfolio, but perhaps hasn’t performed well recently. The assessment for when to sell depends on the short- and long-term expectation of the holding, and the benefit of “realizing” the loss.
Second, this is a strategy that’s most often undertaken at the end of the calendar year; the intent is to increase the “net” rate of return within a portfolio. Reason: A portfolio may sell off “losers” throughout the course of the year. So the amount of gains that may need to be offset is often apparent later in the calendar year. You can carry losses forward into the next tax year, but there’s a limit to how much of a carried loss can be used each year.
Third, tax-loss harvesting only affects non-qualified, after-tax accounts or money. If someone is comfortable investing their own portfolio, tax-loss harvesting should be a technique they are familiar with. The challenge is deciding when to sell a holding that has significantly appreciated and choosing the appropriate account to offset this appreciation.
Remember, begin your research about what to sell at least a few months before the end of the year. You don’t want other year-end pressures and commitments to cause you to make hasty decisions about your finances.
Do you have a view on tax-loss harvesting? Send your comments to [email protected].