Strategic Tax Optimization: A Guide to Maximize Benefits through Loss Harvesting

Did you know that there can be a silver lining to losing money on investments?  I know… it sounds crazy, but if done right, tax loss harvesting is a strategy that can potentially save you taxes over the long-run and work investment losses in your favor.

I’m Darren from Simmons Capital Group, and today, I am going to highlight the benefits of implementing tax loss harvesting techniques in your investment accounts. 

First, let’s clarify that tax loss harvesting only benefits you from a tax perspective in non-retirement investment accounts.  As you don’t pay taxes on gains each year in your IRA and Roth IRA, tax loss harvesting in IRA’s don’t help reduce your tax bill.  For the remainder of this video, when I speak about tax loss harvesting in an investment account, remember that I am referring to a non-IRA investment account, the type that you pay taxes on each year. 

Let’s start by giving you an explanation, using 2 stocks as an example.  Note that these are just examples for illustration purposes, and certainly not an investment recommendation.  Let’s assume you hold stock of Ford Motor company and it has gone down in value since you bought it. A savvy investor could potentially sell Ford Motors (F) stock and immediately use the proceeds to buy stock in General Motors (GM).  What this investor has done, is effectively locked in the loss on Ford stock, which is good from a tax perspective, and put the proceeds into another stock that is in a related/similar industry and should benefit from a subsequent rebound in that sector.  In other words, you still have exposure to an automaker, but you have locked in losses for tax purposes.

Let’s put some simple numbers to an example to further illustrate:

Imagine you bought $10,000 of stock A.  Due to some bad news, the stock price of stock A drops, and now your investment is only worth $8,000.  In this scenario, you have lost 20%, or $2,000.  At this point, you could just continue to hold the stock, waiting for a potential rebound, you could sell out of the stock, lock in the loss and take your $8,000 out of the market, or you could tax loss harvest, essentially selling stock A for $8,000, and immediately reinvest these proceeds into stock B.  This $2,000 loss can then be used to reduce other gains.

Say you made $2,000 on another investment that you sold that year.  Your $2,000 gain would usually cost you about $300 in taxes, assuming a 15% capital gains tax rate.  However, using your harvested $2,000 loss from the sale of stock A effectively wipes out your gain, and therefore saves you $300 in taxes for that year.  That’s a pretty cool silver lining.  While the numbers in this example are pretty small, they can very quickly add up to large tax savings over the course of your life. 

Note that if you have $3,000 more in losses than gains for a given tax year, the benefit of those losses is not lost.  You can actually carry forward those capital losses into the future, using them to offset future gains and therefore reducing your future tax burden.   

Over time, the tax savings from loss harvesting can accumulate and have a significant positive impact on your investment returns, particularly for high-income investors subject to capital gains taxes. However, it's important to be aware of certain rules and limitations associated with tax loss harvesting, such as the wash-sale rule. The wash-sale rule prevents you from repurchasing the same or substantially identical securities within 30 days before or after selling them for a loss, as this would disqualify the loss for tax purposes.

As tax laws and regulations can change, and the specific tax benefits of loss harvesting may vary based on your individual circumstances, such as your tax bracket and the types of investments you hold, it's advisable to consult with a tax professional or financial advisor to create a tax-efficient investment strategy that aligns with your financial goals and tax situation. Additionally, it's important to execute loss harvesting strategies in compliance with tax laws to avoid any unintended tax consequences, such as violating the wash-sale rule.

If you would like to discuss the various types of strategic planning you can do, please book a time by calling our office at 518-406-5624 or by visiting our website at simmoncapitalgroup.com.

Thank you for watching. We’ll see you next week.