Tax loss harvesting in down markets

When stocks or bonds decline in value, you may be able to harvest those losses to offset capital gains elsewhere.

What Is Tax Loss Harvesting?

Harvesting losses means selling investments in taxable accounts that have lost value to offset capital gains elsewhere and help reduce taxes owed.

What Happens When You Sell a Position That Has Lost Value?

  • The loss offsets capital gains from selling securities at a profit during the year, as well as annual capital gain distributions of mutual funds.
  • If capital losses exceed gains at year-end (or if there are no gains), losses can offset up to $3,000 in non-investment income, even though it is often taxed at a higher rate than capital gains.
  • You can carry forward losses above $3,000 to offset capital gains and ordinary income over your lifetime.

What Is the Wash-Sale Rule?

  • The Internal Revenue Service’s Wash-Sale Rule prohibits claiming a loss on the sale of an investment if the same or “substantially identical” investment is purchased either 30 days before or after the sale date.
  • A “tax swap” can serve as a placeholder to maintain exposure to the asset class for 30 days. After 30 days, you can decide whether to switch back to the original holding.

Reposition Portfolios

Tax swaps enable you to invest proceeds from the sale of a losing position to lower costs or target new markets.

Don’t Wait Until Year-end

The time to harvest losses is when losses occur. Investments that are down early in the year could bounce back into positive territory — resulting in missed opportunities to sell losers and book losses to offset gains.

To get maximum value from tax loss harvesting, take a long-term view of the asset and your needs when making decisions and consider: 

Loss Amount

If a loss is less than $2,000, transaction and tracking costs may erode tax savings.

Holding Period

The longer you plan to hold the asset, the greater the chance that the tax savings you’ve re-invested will grow.

Legacy Plans

If an asset will be left to heirs, there’s less need to measure the value of harvesting a current loss against future taxes due. Because heirs receive a step-up in basis, asset appreciation doesn’t turn into a future tax liability.

This post first appeared on September 14th, 2023 on the State Street Global Advisors’ blog




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