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Tax Loss Harvesting: Turning Financial Lemons into Lemonade

By Todd Berg, ChFC®

June 6, 2024

While we are confident in the market's ability to grow and deliver positive returns over the long term, we equally recognize that it doesn't climb in a straight line. Corrections, defined as market drops between 10% and 20%, occur almost annually. Historically, the market has always rebounded and reached new highs. However, these temporary declines present excellent opportunities to harvest tax losses. Tax Loss Harvesting is a strategy that savvy investors use to turn financial lemons into lemonade—or more accurately, into tax savings. If you've been looking for a way to help lower your tax bill while bolstering your investment portfolio, keep reading.

What is Tax Loss Harvesting?

Tax Loss Harvesting (TLH), is the practice of selling investments that are at a loss to offset the capital gains you've made elsewhere in your portfolio. This might sound counterintuitive at first—why sell anything at a loss? The magic lies in the tax savings. By reducing your overall capital gains, you lower your taxable income, which in turn reduces your tax bill. Think of it as a silver lining when some of your investments haven't performed as expected.

The Benefits of Tax Loss Harvesting

The advantages of TLH extend beyond just lowering your immediate tax bill. When you reinvest the savings back into your portfolio, you're setting the stage for future growth. It's like getting a second chance to make a first impression with your investments. Additionally, this strategy allows for deferring taxes into future years when your tax rate may be lower, optimizing your long-term financial plan.

For Example: Consider Jane Doe, who invests $10k in Stock X and $10k in Stock Y. By the end of the year, Stock X soars, netting her a $5k gain, while Stock Y takes a downturn, resulting in a $5k loss. Normally, Jane would owe taxes on the $5k gained from Stock X. However, by selling Stock Y at a loss, she can offset her gains, bringing her taxable income from these transactions down to zero. Jane then reinvests her savings, positioning her portfolio for potential future growth without the immediate tax bite.

Navigating the Drawbacks

While Tax Loss Harvesting is a powerful tool, it's not without its limitations. The IRS has rules, such as the wash-sale rule, which prevents investors from claiming a tax deduction for a security sold at a loss and then repurchased within 30 days. It’s crucial to be aware of these regulations to avoid unintended consequences.

Additionally, tax rates and financial situations change. What saves you money on your taxes this year might increase your tax burden in the future. It's about striking the right balance between short-term benefits and long-term financial health.

Your Financial Ally

Understanding and applying Tax Loss Harvesting can seem daunting, but it doesn't have to be. By staying informed and considering your long-term financial strategy, your advisor can apply this technique to not just help minimize taxes, but also to actively contribute to your investment goals.

Remember, every investor's situation is unique. you should always consult with your financial advisor to tailor the strategy to your specific circumstances. With the right approach, Tax Loss Harvesting can be an empowering tool in your wealth management arsenal, helping you turn market corrections into opportunities for tax savings and portfolio growth.

By now, you should feel more equipped to discuss Tax Loss Harvesting with your financial advisor, or feel to reach out to us, to discuss your current strategy. 

1IRS.gov, January 30, 2024
2Investopedia, February 28, 2024

The content is developed from sources believed to be providing accurate information. 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. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investment advisory services are offered through Guardian Wealth Management, an SEC Registered Investment Advisor.