Ever think about lowering your taxes with the strategy of tax-loss harvesting?
Tax-loss harvesting is the practice of selling an investment at a loss and matching the loss against a gain of different security that you sold. By offsetting losses against gains, capital gain taxes are only paid on the net profits. While it may be tempting to save on taxes, consider the following points before selling positions:
The wash sale
Presumably, you originally bought a stock because you believed in the company’s potential for growth (read: profit). If you sell and buy it back within 30 days, you made a “wash sale.” Wash sales negate any U.S. tax-loss selling strategies, and your attempt to harvest a tax-loss would be disallowed by the IRS. Don’t be the short-sighted individual who sells at a loss, and then, in the next month buys again. This scenario invalidates any potential benefit of tax-loss harvesting and causes losses by increasing trading costs.
Impending tax law changes
Selling a position at a loss allows you to offset taxes on potential capital gains in a given tax year. However, since the tax codes are constantly changing you can’t know what your future tax situation will be. If the government raises capital gains tax next year, you may have been better off saving your tax-loss harvesting to use in a year with a higher capital gains tax. Also, for American tax-payers, capital gains tax is different on long- and short-term investments, so your holding time of the security may affect its potential taxes.
The uncertainty of the market adds ambiguity to tax-loss selling, as an unrealized loss might actually turn around. If you sell just to capture the loss, you can’t benefit from the recovery. While tax considerations should come into play when making buy/sell decisions, tax considerations should never be the only reason behind a transaction.
If you are considering tax-loss harvesting, consult both your tax and financial professionals. Ask your accountant before making any decisions that can affect your taxes since we don’t give tax advice. Call my office (02-624-2788) if you have any questions about your investments.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published May 2, 2016. Updated May 2020