As the year comes to a close, it’s an ideal time to finalize your tax loss harvesting strategy. For many investors, tax loss harvesting provides a way to offset gains, reduce taxable income, and possibly improve portfolio efficiency. We aim to guide our clients through tax planning strategies that might have a positive impact on their financial situation, without promoting any undue concerns or relying on unrealistic expectations. Here’s a detailed look at tax loss harvesting and key considerations as we move toward the end of the year.

Understanding Tax Loss Harvesting

Tax loss harvesting is the process of selling investments that have decreased in value to realize a loss. These losses can be used to offset the gains made elsewhere in your portfolio, potentially lowering your taxable income. While tax loss harvesting may seem like a straightforward strategy, understanding its mechanics and implications is important for implementing it effectively.

Key Considerations for Your Tax Loss Harvesting Strategy

1. Timing of Sales and Harvesting Losses

The timing of your tax loss harvesting transactions is an important factor. The strategy generally works best when losses are realized by the end of the calendar year, so they can be applied to offset gains in the same tax year.

• End-of-Year Consideration: To ensure that losses are applied to this year’s taxes, sales of assets must be made by December 31. This gives you the opportunity to use any losses to offset gains for this year’s tax filing. If you have gains in your portfolio, it’s worth considering whether harvesting some losses makes sense before the year ends.
• Losses and Gains Offset: It’s important to remember that tax loss harvesting doesn’t erase losses entirely. Instead, losses can be used to offset capital gains, dollar-for-dollar. If you have more losses than gains, the remaining losses may offset up to $3,000 of ordinary income per year for individual filers ($1,500 for married individuals filing separately). Losses above this amount can be carried forward to offset future gains.

2. Avoiding the “Wash Sale” Rule

A common pitfall in tax loss harvesting is the wash sale rule. The wash sale rule disallows a tax deduction if the investment is repurchased within 30 days of the sale. To comply with this rule, ensure that you do not buy back the same or substantially identical security within the 30-day period after selling.

• Alternative Investments: If you want to maintain exposure to a certain sector or asset class, you might want to consider purchasing a different security that provides similar exposure but is not considered “substantially identical.” This allows you to maintain your portfolio allocation while still realizing a tax loss.

3. Taxable Accounts vs. Tax-Advantaged Accounts

Tax loss harvesting applies primarily to taxable investment accounts, such as brokerage accounts. It is important to note that tax loss harvesting does not apply to tax-advantaged accounts like IRAs or 401(k)s. Losses realized in these accounts do not affect your taxable income because the tax treatment of these accounts already differs.

4. Integrating Tax Loss Harvesting into Your Financial Plan

Tax loss harvesting can be a valuable strategy to reduce taxable income, but it’s essential to consider its impact on your overall financial plan. A thoughtful approach ensures that short-term tax benefits align with your long-term objectives.

• Portfolio Rebalancing: Selling investments to harvest tax losses may alter your portfolio’s asset allocation. It’s important to reinvest proceeds into positions that maintain your desired allocation and align with your financial goals. This ensures your portfolio stays balanced and diversified.
• Maintaining Your Investment Strategy: Tax loss harvesting should complement your overall investment strategy, not disrupt it. The goal is to improve tax efficiency while staying on course to meet your long-term financial objectives. Discussing strategies like this with us will help you gain a better understanding and provide clarity.

5. Capital Gains and Losses in 2024

In the context of tax loss harvesting, understanding current capital gains rates is critical. As of 2024, long-term capital gains (on assets held for over a year) are generally taxed at preferential rates. For most taxpayers, long-term capital gains are taxed at 0%, 15%, or 20%, depending on taxable income levels. Short-term capital gains (on assets held for one year or less) are taxed at ordinary income rates.

Final Thoughts on Tax Loss Harvesting

“Taxes are unavoidable, but they take a significant chunk out of your income, leaving less to invest,” as Ballentine states in Chapter 6 of Wealth on Purpose. One strategy that may help reduce taxable income is tax loss harvesting. By offsetting capital gains with losses, you may be able to lower your overall tax liability. By being proactive, working with us, and making thoughtful decisions about which assets to sell, you could improve your tax situation, allowing more of your income to be available for future investment as we approach the end of the year.

If you have any questions regarding your portfolio, please give us a call!

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Sources:

• Internal Revenue Service (IRS) – Tax Loss Harvesting Guidelines
• Investment Company Institute – Tax Planning Strategies
• The Balance – Understanding Capital Gains Tax
• IRS Publication 550 – Investment Income and Expenses

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This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.

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