No one is happy with today’s negative returns. But big losses present big tax-loss harvesting opportunities. Harvesting losses is the process of selling a security in a taxable account at a loss and using that loss to offset realized taxable gains elsewhere in the portfolio to help reduce taxes.
And with global stocks and bonds both down on the year, you may be looking at the most significant tax-loss harvesting opportunities in decades.
Follow Tax-Loss Harvesting Rules
In taxable accounts, when you sell a position that has lost value, you can use the loss to offset capital gains that result from selling securities at a profit during the year. Your booked losses can also offset funds’ annual capital gain distributions.
At year-end, if your capital losses exceed your gains (or if you don’t have any gains), you can use the losses to offset up to $3,000 in non-investment income, even though that is often taxed at a higher rate than capital gains. Losses greater than $3,000 carry forward and can be used to offset capital gains and ordinary income over your lifetime.
Importantly, when reinvesting proceeds from the sale of a losing investment, you must abide by the Internal Revenue Service’s Wash-Sale Rule, which 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.
SPDR ETFs to Consider as Swaps
Spanning all major asset class categories, SPDR ETFs can be swap options for both stock and bond portfolios.
If you harvest losses only at yearend as many investors do, investments that were down early in the year could bounce back into positive territory — resulting in missed opportunities to sell losers and book losses to offset realized gains. That’s why it is best to implement tax-loss harvesting throughout the year as losses occur.
Down markets can be challenging, but they do offer the chance to reduce your tax burden — and potentially your costs if you replace losing positions with low-cost ETFs.
Tax Loss Harvesting A strategy designed offset capital gains tax liabilities by selling securities at a loss. Selling at a loss allows investors to accrue tax credits that can be matched with tax liabilities, thereby reducing an overall tax bill. The strategy is most often used to offset liabilities of short-term capital gains, which are taxed at a higher rate than long-term gains, i.e., gains on assets held a year or more.
The IRS rule that prevents claiming a loss for tax purposes on sales of securities if selling investors purchase a “substantially identical” security within 30 days of that sale. Investors sometimes manage the restrictions of the wash-sale rule by purchasing a related security within the 30-day period — such as a S&P 500 ETF in place of a single company within that index.
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