Minimize your tax bill with tax-loss harvesting at year-end

Casey Bear |

No one likes to see losses within their portfolio, but it can happen to even the savviest investor.  Tax-loss harvesting can turn those losses into potential tax savings, but it must be conducted by year-end.

The concept of tax-loss harvesting is simple: you sell investments that are down for the year, replace them with reasonably similar investments, and then offset realized investment gains with those losses. The result is that less of your money goes to taxes and more can stay invested and working for you.

In practice, tax-loss harvesting can be a complex set of transactions that must be conducted within highly specific guidelines.  However, if you’re indexing using funds that focus on a particular niche (a sector, geographic area or market cap, for example), there could be tax-loss harvest opportunities.  Overly aggressive tax-loss harvesting--selling fundamentally sound investments--may cause you to be worse off in the long term by losing the value of compounded interest in an investment that would grow over time.

Tax-loss harvesting isn’t useful in retirement accounts, such as a 401(k) or an IRA, because you can’t deduct the losses generated in a tax-deferred account.  There are other restrictions on using specific types of losses to offset certain gains and doing so within certain timeframes.

If you do decide to sell an investment to harvest the loss, deploy the proceeds thoughtfully. Use them to rebalance your portfolio or invest in a company that you have on your watch list; buy into an ETF or mutual fund that gives you exposure to a sector or asset class that you currently lack; or add to an existing position you believe still has great potential.

Tax-loss harvesting is a strategy best conducted in concert with a total wealth management strategy and taking into consideration your entire asset allocation.  Contact your Cranbrook Wealth investment professional to ensure your portfolio is harvested for losses legally and efficiently.