For investors with taxable accounts, tax-loss harvesting can be a valuable strategy to help manage tax liability while staying committed to a long-term investment plan.
Put simply, tax-loss harvesting involves selling investments that have declined in value from their purchase price or cost basis to realize a loss. These losses may then be used to help offset realized gains elsewhere in a portfolio, or, in some cases, reduce taxable income within certain limits.
While the concept is straightforward, effective implementation requires coordination with your overall investment and tax strategy.
A Tool for Managing Investment Taxes
Losses harvested from taxable investments can be used to offset capital gains, which may occur when selling other appreciated assets. If losses exceed gains, a limited portion may be used to reduce ordinary income, with any unused amount carried forward to future years.
It’s also important to consider holding periods, as short-term and long-term capital gains are taxed differently. Tax-loss harvesting strategies typically take this into account to align with broader goals and timelines.
However, not every market dip results in action. Tax-loss harvesting is one of many tools that may be considered depending on your overall plan, tax picture, and investment philosophy. It’s also subject to IRS rules – like the wash-sale rule – that may disallow a loss if a substantially identical security is repurchased too soon.
When Does Tax-Loss Harvesting Make Sense?
For many high-net-worth investors, tax-loss harvesting is most effective when:
- Managing a large capital gain from another investment or liquidity event
- Rebalancing a portfolio in a tax-conscious way
- Navigating year-end tax planning opportunities
It’s not about reacting to short-term market movements, but rather making informed decisions within a larger, proactive strategy.
How Foster & Motley Can Help
At Foster & Motley, we take a comprehensive approach to tax and investment planning. Our investment team collaborates with in-house financial planners and CPAs to identify opportunities – such as tax-loss harvesting – when appropriate.
We don’t chase tax strategies for their own sake. Instead, we help ensure your investments and taxes are working together to support your unique situation, goals, risk tolerance, and long-term plan.
Want to understand how tax-aware investing fits into your bigger picture? Schedule a discovery call to start a conversation today.
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