Tax Loss Harvesting Strategy (TLH)

What is tax loss harvesting (TLH)? It is selling investments at a loss in a taxable account to reduce capital gains you may have incurred in your portfolio.   

How tax loss harvesting works

Since you cannot deduct losses in tax-deferred and tax-free accounts, you only do TLH in taxable accounts, but still consider your investment holding in your other accounts due to the wash sale rule of the Internal Revenue Code. More on the wash sale rule later.

You want to check your cost base method and see if you can change it to Specific Share Identification. Every time you purchase shares of an investment, including the reinvestment of dividends and capital gains distributions, you create a tax lot. With specific share identification, you can sell only the tax lots at a loss, not those with a gain. This will generally help increase the TLH strategy.  

You must consider the wash sale rules once you identify the position and the lots you want to sell.

You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

1. Buy substantially identical stock or securities,

2. Acquire substantially identical stock or securities in a fully taxable trade,

3. Acquire a contract or option to buy substantially identical stock or securities, or

4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

   
   

If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale." IRS Publication 550 (2023), Investment Income and Expenses.

Due to the wash sale rules, selling your S&P 500 index shares from one company and purchasing the index from another would disallow the loss. Married taxpayers should also consider their spouse's positions and possibly other family members.*

Ideally, after you sell your shares for a loss, you want to reinvest your proceeds in a position or a combination of positions with similar upside capture (see Morningstar article Upside/Downside Capture Ratio). If the position you sold would have recovered the loss, so would the new position or combination of positions. You are trying to capture the loss but not change the risk of your overall portfolio.  

A CFA Institute Research and Policy Center study found that tax loss harvesting can add up to 1.10% to income after-tax returns (An Empirical Evaluation of Tax-Loss-Harvesting Alpha)

You can do your TLH anytime during the year and more than once if you follow the wash sale rules. In my experience, many investors wait to do their TLH at the end of the year, but this strategy could possibly leave some TLH opportunities on the table. The cutoff for losses to be booked in the current tax year is normally December 31st or the last trading day of the year.*

The higher your tax bracket, the higher the potential tax savings. Three capital gains tax brackets are 0%, 15%, and 20%.** If your capital losses exceed your capital gains, the excess loss you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss on line 16 of Schedule D (form 1040). Any used losses are carried forward to the following year.*

Given the strategy's complexities and benefits, consider hiring a financial advisor to implement the strategy on your behalf.

Schedule your free 30-minute consultation above to learn more about Tax loss harvesting and if it can potentially benefit you.  

Source IRS Publication 550. *IRS.gov Topic no. 409, Capital gains and losses.

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors and Synergy Wealth Management are separate entities. 

The information in this material is not intended as tax or legal advice. Synergy Wealth Management does not advice tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Content in this material is intended for general information purposes only and should not be construed as specific investment advice or recommendations for any individual.  Please contact your advisor with any questions or for specific recommendations regarding your own circumstances. Investing involves risks including possible loss of principal. There can be no assurance that a specific strategy will yield a profitable result or protect against losses