Jonathan M. Gardey, MBA, CFA®, CFP®
President and Chief Executive Officer
At the end of the day, the only number that really matters to you as an investor is the total dollar amount you are able to take home. Right? Afterall, everyone wants more money (not less) from their investments. But large gains don’t always equal more money.
Depending on your unique financial situation and your portfolio’s performance, any large gains could mean less money to take home.
But how can that be? Well, you owe taxes on all of those gains, and your tax liability could offset a portion of your profit.
Talk about having the wind taken out of your sails. But don’t fret just yet about Uncle Sam’s cut ruining your take-home pay. There is a strategy called tax-loss harvesting that can help you keep more of your money.
What is Tax-Loss Harvesting?
Much like shedding some unwanted weight, tax-loss harvesting allows you to gain by losing instead of losing by gaining.
Tax-loss harvesting is the deliberate strategy of selling an investment for a loss in order to offset taxes you owe from an investment that was solid for a profit. Here’s how it works:
- You sell an investment for a profit: When you sell an investment for a profit, you are now liable for what is called capital gains. Capital gains are the difference between what you paid for an investment and for what you later were able to sell it. [i] These capital gains then would go on your tax return and would be taxed at your capital gain tax rate.
- You purposefully sell an investment for a loss: In order to lower the amount of taxes owed on the profit you just made, you and/or your advisor look for opportunities to sell a different investment at a loss. The loss is determined the same way as a gain, by subtracting the initial cost of your investment from the amount you sold for.
- You report a lower total of capital gains: The loss you just took is allowed to be deducted from your total capital gains for the year. The new amount then is what goes on your tax return as income. If the total losses exceed the gains, you can use the remaining loss balance, up to $3,000.00, to offset your personal income and then carry any additional losses forward in order to offset gains next year or beyond.
- You reinvest the money in a different investment: With tax-loss harvesting, your tax bill for the investment that took the loss is really only being pushed back instead of completely canceled because you will reinvest the amount remaining from your sale. But the idea is that by saving on taxes this year and wisely reinvesting the amount you saved, over time your investment will grow more and more to the point that the gains far outweigh any future tax bill.
Just keep in mind that choosing “loser” investments should never be the goal.[ii] Tax-loss harvesting is simply another strategy to help your portfolio continue to grow.
When You Should Use Tax-Loss Harvesting?
Tax-loss harvesting can be a great tool anytime, but the best time to harness this strategy is toward the end of the calendar year.
As the holidays approach, you will want to start looking for any loser investments that will give you more opportunities to offset gains elsewhere. This will help lower your overall capital gains tax liability for the year when it comes time to file your taxes.
And even if you end up with more losses than gains, remember that you can still deduct up to $3,000[iii] from your regular income and push any additional losses to future years. There is no expiration date for capital losses. [iv]
Who Benefits from Tax-Loss Harvesting?
Of course, tax-loss harvesting isn’t the best strategy for everyone. It depends on the kind of investments you have, your tax bracket, your investment horizon — how long you expect to hold onto an investment — and how much capital gains you are likely to have at the end of the year.
Tax-loss harvesting is not helpful at all for your traditional retirement accounts like a 401(k) or IRA or a 529 College Savings Plan because you can’t deduct the capital losses from a tax-deferred account. And because capital gains are taxed at 0% for those earning less than $41,675 for single filers or $83,350 for married couples filing jointly, tax-loss harvesting will not help if you are in a lower income bracket.
However, tax-loss harvesting can be especially helpful for high-net worth (HNW) investors or those on the cusp of the higher tax brackets who have taxable investments because, again, it can lower your overall taxable income and also, possibly, lower your capital gains tax rate. But even investors in these groups should make sure they have a fairly long investment horizon so that they can hold onto their investments long enough to realize the tax-savings benefits.
How to Get Started
Tax-loss harvesting can be complicated and even possibly a pitfall for certain people. Our financial advisors are experts on tax-loss harvesting and other strategies to help maximize your portfolio’s performance. For more information about the comprehensive planning services we provide, we encourage you to visit our site, learn more about our services, and see if we could be a good match. We best serve clients looking for exceptional client service, who value a long-term partnership, and have a minimum of $500,000 in investable assets.
Important Disclosure Information
To better understand the nature and scope of the advisory services and business practices of Gardey Financial Advisors Inc., please review our SEC Form ADV Part 2A and ADV Part 3 (Form CRS) available via the SEC's website, www.adviserinfo.sec.gov. (Click on the link, select “Investment Advisor Firm,” and type in the firm name. Results will provide you both Part 1, 2 and 3 of the Gardey Financial Advisors Form ADV.) Statistics from third-party sources are deemed to be accurate but have not been confirmed by Gardey Financial Advisors.
This communication is for informational purposes only and does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or is a substitute for, personalized investment advice from Gardey Financial Advisors. The opinions expressed reflect our judgment now and are subject to change without notice and may or may not be updated. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied, is made regarding future performance. Readers who are not market professionals or institutional clients of Gardey Financial Advisors should seek the advice of their financial advisor, tax, or legal advisor before making any investment decisions based on this communication. Gardey Financial Advisors does not render legal, accounting or tax advice. Gardey Financial Advisors works closely with our client’s other professional advisors. The solutions discussed may not be suitable for you, even if your situation is like the example presented. Investors must make their own decisions based on their specific investment objectives and financial circumstances. It should not be assumed that the recommendations made in this situation will result in the mentioned outcome. The commentary does not represent any specific clients, investments, or strategies.
Capital Gains: https://www.investopedia.com/terms/c/capitalgain.asp
Loss Balance ($3000): https://www.irs.gov/pub/irs-news/at-03-29.pdf
Capital Losses: https://www.investopedia.com/terms/c/capitalloss.asp
[i] https://www.investopedia.com/terms/c/capitalgain.asp 21 October 2022
[iii] https://www.irs.gov/pub/irs-news/at-03-29.pdf 21 October 2022
[iv] https://www.investopedia.com/terms/c/capitalloss.asp 21 October 2022