The leaves are changing colors and the evenings are cooling off as we approach the end of the year. These last few months bring a unique opportunity for investors to decrease their tax burden by harvesting losses in investment accounts.
What is Tax-Loss Harvesting?
Tax-loss harvesting (or tax-loss selling) is the process of realizing capital losses by selling securities that have underperformed at a net loss. These losses can help offset capital gains and reduce the total tax burden of an investor for the year.
If an investor does not have capital gains, they can still utilize tax-loss harvesting to reduce their standard taxable income for the year. ($3,000 of ordinary taxable income or $1500 for married couples filing separately.)
Additionally, long-term losses (securities sold at a loss after being held for longer than a year) can be carried forward to future years, reducing taxable income by an additional $3000 each year.
Of course, only taxable accounts can take advantage of this technique.
What happens to the cash?
Selling securities, even at a loss, generates cash. How do we put these funds back to work? There are two primary strategies.
1 ) Rebalance the account
If the account was overweight in that specific allocation, this cash can be used to purchase securities in a different asset class to rebalance the overall allocation.
2) Repurchase the security
a) Repurchase and hold cash:
If the allocation is balanced and the security sold is still a prudent investment, our operations team will repurchase the security after 30 days. Why 30 days? This is to comply with the IRS’ Wash-Sale Rule. This rule prohibits taking a tax deduction on a loss if that same security is repurchased within a 30-day period. The cash from the sale will be held in the account until the waiting period is complete and it can be used to repurchase the asset.
b) Repurchase and hold proxy:
In order to maintain market exposure during that 30-day period, we often purchase a proxy security that best represents your investment goals. That proxy is then sold when the original security is repurchased after those 30 days.
“In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed.”
-U.S. Tax Code § 1091
What do I need to do?
Tax-loss harvesting is part of Greenwood Capital’s overall strategy. Each advisor closely monitors their clients’ accounts for opportunities to realize losses and offset gains. They coordinate with our operations team who initiates the sale and repurchases securities in the new year, if necessary.
Our clients do not need to take any steps to initiate tax-loss harvesting. Of course, if you ever have any questions about the process, please reach out to your advisor.
The holidays are approaching, and you should be spending time with family and enjoying the changing seasons.
Our goal is to secure your peace of mind and take what we can off your plate.
Greenwood Capital is an SEC registered investment advisory firm. This material has been prepared for information purposes only, and is not intended to provide, and should not be relied on solely for tax, legal or accounting advice. The information contained within has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment advisor.
