Now Is the Time for Tax-Loss Harvesting

It has been a challenging year for investors as stocks and bonds are significantly down across all markets.  At times like these, investors tend to feel the urge to “do something.” It’s a natural inclination, guided by the same impulse as the fight-or-flight response when we perceive danger.  While it has helped humans survive the rough and tumble environs that we have faced for eons of evolution, “doing something” when markets are volatile tends to be counterproductive for investors…unless that thing is tax-loss harvesting.  

 

What is Tax-Loss Harvesting?

Tax-loss harvesting is a strategy involving realizing capital losses from positions in a portfolio that have declined in value and using them to offset gains realized elsewhere in the portfolio (ex: profitable sales of other investments, capital gain distributions). 

 

The benefit to investors of implementing an active tax-loss harvesting strategy is generating potentially higher net after-tax returns. Research suggests this strategy can add anywhere from 0.40% to over 4% per year to overall returns (depending on the market environment and individual's tax situation)[1]

 

How it Works

There are three basic steps in the tax-loss harvesting process:

  1. Identify investments that have lost value as candidates to sell and harvest losses.
  2. Find a suitable replacement for the sold investment to maintain the desired asset allocation/investment exposure, while avoiding wash sales (see below ). 
  3. Use the capital loss to offset capital gains and current income, or carry them forward.

 

Important Considerations

Essential issues that you will want to keep in mind when considering engaging in tax-loss harvesting include:

 

  • Wash Sale Rule - an IRS regulation that prohibits investors from using a capital loss for tax-loss harvesting if the identical security, a "substantially identical" security, or an option on such a security has been purchased within 60 days of the sale that generated the capital loss. This rule means that investors must refrain from buying an identical or "substantially identical" security (including an option to purchase) for 30 days before or after the sale date when a capital loss is realized. 
  • Cost Basis Calculations The cost basis is what you initially paid for a security (plus any other costs or fees). It helps determine if you have any gains or losses.  If you have made multiple purchases of the same security over time through systematic contributions or dividend reinvestments, you can calculate your cost basis either as a per-share average of all the purchases (aka the average-cost method) or by using the actual cost of each lot of shares (aka the actual cost method).

 

The Bottom Line

Tax-loss harvesting can be valuable to your overall financial planning and investment strategy. However, pursuing tax savings should complement your overall investment goals, not derail them. Implementing a balanced and diversified strategy to ensure that your investments align with your objectives is the prudent approach. 

 

Ultimately, tax-loss harvesting can be beneficial, but it can also be nuanced and complex. Therefore, before selling assets, talk with a financial and/or tax professional to determine a suitable strategy.

 

[1] Source: Derek Horstmeyer “Just How Valuable is Tax-Loss Harvesting” Wall Street Journal, 4 Dec 2021

 

 Symmetry Partners, LLC, provides this communication on this site as a matter of general information. Information contained herein, including data or statistics quoted, are from sources believed to be reliable but cannot be guaranteed or warranted. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. All content on this site is for educational purposes and should not be considered investment advice, recommendation or offer of any security for sale. Symmetry Partners does not approve or endorse any third party communications on this site and will not be liable for any such posts.

Symmetry Partners, LLC is an investment advisory firm registered with the Securities and Exchange Commission (SEC). The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.

Investing involves risk, including the loss of some or all of your principal. Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market.

 

 

 

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