During this time of year, you may be getting calls from your financial advisor about tax loss harvesting some of your investments in your portfolio. But what does it actually mean?
In this blog, we are going to discuss the practice of tax loss harvesting and how it can impact your financial situation. A quick note before we get started, Rockline Wealth Management does not provide tax services and this should not be taken as tax advice. Please consult your tax professional to speak about your specific situation.
Tax loss harvesting is an investment strategy whereby investors sell securities at a loss to hopefully offset potential realized gains on the year. Capital gains and losses are the difference between the price at which you paid for shares of a security versus the price at which you sold the security.
There are two forms of capital gains and losses that you should be aware of: short-term capital gains and losses and long-term capital gains and losses.
Short-term gains and losses occur when you have bought and sold a security within a year, whereas long-term gains and losses occur when you have bought and sold a security which you held for longer than a year. It's very important to know the difference because they are taxed at different rates. Short term capital gains are generally taxed at your income rate while long term capital gains are generally capped at a 20% tax rate. This can amount to quite a large difference in taxes being paid.
When you're doing your tax loss harvesting, it's important to ensure that you are selling positions in a taxable investment account as opposed to a retirement account like an IRA or a Roth IRA where this wouldn’t be applicable.
While beneficial in some cases, it isn't always the right choice to make if you like the long-term prospects of the security that you might be selling.
It is important to understand one caveat, which is the wash rule: If you sold a security, it must be out of the portfolio for longer than 30 days before you buy it back after selling to realize the loss. This is one of the many reasons why we would encourage you to speak with your team of professionals, including your financial and tax professional, before making any decisions.
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Disclosures:
Rockline Wealth Management (RWM) is a registered investment adviser located in Plainview, NY. RWM is registered with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.
Rockline Wealth Management does not offer tax services. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's investment portfolio. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses.
Real-life examples given in this video should not be viewed as guaranteed outcomes when investing. Past performance is not indicative of future results and every individual’s investment circumstances are different. Individuals should consult their financial professional before implementing their investment plan.