Year-End Financial To-Do: Considering the Tax Loss Harvesting Strategy

Nov 26, 2019

By Chris Whiting, CFP®, Executive Vice President, Director of Sales and Marketing

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2019 has been another strong year for many equity markets.  So, while many investment portfolios likely have positions with unrealized gains – a well-diversified portfolio will probably also have some positions that over time have lost value – and therefore have unrealized losses.  No one likes to lose money, however an approach to consider which may benefit your long-term investment strategy is to sell some of your positions that are at a loss and use those losses to offset gains in other securities.  This practice is called “tax loss harvesting”.

When you sell a security there are two categories of gains and losses – short and long-term.  Short-term gains/losses are realized on investments that you’ve owned for one year or less; while long-term gains/losses are realized on investments held longer than a year.  Short-term gains are taxed as ordinary income based on your marginal tax bracket; and long-term gains are taxed at lower capital gains rates which range between 0% and 20%.

For tax purposes, all short-term gains and losses are netted first against each other.  Similarly, long-term gains and losses are netted against each other.  Then, these two figures are combined to determine the overall net short-term or net long-term gain or loss. If the resulting figure is a loss, you can take up to an additional $3,000 of capital losses against ordinary income on your federal tax return. Any remaining losses may be carried forward to the next year.

Once you sell a security you will need to evaluate how to invest the proceeds and it’s important to be aware of the “wash sale” rules.  The wash sale rules restrict you from purchasing the same or substantially similar security within 30 days of the sale of the original investment and recognizing the loss – this includes the period 30 days prior to the sale, and 30 days after the sale.  Therefore, if you’d like to purchase the same security, to avoid violation of the wash sale rule, you can wait 31 days and then repurchase the same security, or you can “double-up” by buying more of the security now, and wait 31 days to sell the original investment.  The last day to double-up during 2019 is November 29th.  Another way to avoid the wash sale is to invest in a different but similar company or industry – thus avoiding the “substantially similar” requirement within the wash sale rule.

A few key takeaways to consider when evaluating tax loss harvesting:

  • Investment losses realized this year can help you reduce your taxes by offsetting this year’s realized gains; and ordinary income up to $3,000 if your losses exceed your gains.
  • Before making any changes, it’s important to make sure your portfolio is aligned with your goals.
  • Trade date is used when determining your holding period, not the settlement date.
  • Managing taxes can be complicated – so it’s important to consult with your tax professional for guidance tailored to your specific situation. Please remember, Benjamin F. Edwards does not provide tax advice.
  • While year end is typically when people consider this strategy – it’s something to evaluate throughout the year.

If you need help evaluating your capital gains and losses for the year, contact a Benjamin F. Edwards financial advisor for help.

Benjamin F. Edwards & Co. does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.