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Reduce taxes and keep more of your gains with smart harvesting techniques that work year-round.
Tax-loss harvesting is a powerful technique where investors sell underperforming assets intentionally to realize a loss. Those realized losses can then be used to offset capital gains elsewhere in the portfolio. By strategically recognizing losses, you reduce your overall tax liability and maintain exposure to your target asset allocation.
This strategy helps investors maximize after-tax returns over time by ensuring more money stays invested and compounds. Losses that exceed gains can even be deducted against ordinary income up to $3,000 per year, with any remaining losses carried forward indefinitely.
Remember that harvested losses only count if you avoid the wash sale rule and its 30-day window. To maintain portfolio alignment, reinvest in a similar but not identical security—for example, switching from one total-market ETF to another tracking a comparable index.
When executed correctly, tax-loss harvesting offers several advantages:
The strategy is most effective in taxable brokerage accounts rather than in tax-advantaged vehicles like IRAs or 401(k)s. Automated platforms and robo-advisors now continuously scan portfolios for opportunities, enabling year-round harvesting without constant oversight.
To stay compliant and reap full benefits, keep these critical rules in mind:
Strict adherence to these rules prevents inadvertent disqualification of losses. Maintain clear records of all transactions and watch replacement security selections carefully.
Consider an ETF portfolio scenario:
An investor purchases $25,000 of a broad-market ETF. The value drops to $20,000. They sell the original ETF and buy a different ETF tracking a similar index for $20,000, realizing a $5,000 loss. That loss can offset future gains, effectively lowering taxable gains to zero when combined with realized profits.
In a simple stock example, suppose you buy Stock A at $400 and sell at $500, realizing a $100 gain. You then sell Stock B at a $100 loss. The two positions offset, leaving you with no net taxable gain and preserving your overall market exposure.
Be cautious of frequent trading, which can lead to complexity and increased transaction costs. Always ensure replacement securities are sufficiently different to avoid wash sale disallowance. Good record-keeping simplifies reporting and future planning.
High-net-worth individuals often leverage separately managed accounts (SMAs) that allow customized loss harvesting alongside tailored investment strategies. These accounts can target specific tax lots and provide granular control over harvesting events.
Robo-advisors such as Betterment and Wealthfront offer continuous tax-loss harvesting algorithms, freeing investors from manual monitoring. Research indicates that systematic, year-round harvesting can outperform traditional year-end only strategies over long horizons.
Due to the complexity of wash sale rules and optimal security selection, consulting a financial advisor or tax professional ensures compliance and maximizes outcomes. Coordinating harvesting with retirement contributions and charitable giving can further amplify tax efficiency.
Tax-loss harvesting is not about market timing or speculative trading; it’s about disciplined, tax-smart investing that enhances compounding power. By integrating these strategies into your portfolio, you can reduce annual tax bills, improve after-tax performance, and keep your long-term plan intact.
Start by reviewing your portfolio for unrealized losses and consult a trusted advisor or automated platform to streamline execution. Embrace tax-loss harvesting as a vital component of your investment toolkit and watch your after-tax returns grow.
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