If you’ve ever asked yourself, “what if there’s a way to reduce the taxes I owe when I sell stocks or rebalance my portfolio?” then you should know about the tax-minimization strategy called tax-loss harvesting. It’s important to know exactly what it is and how it works before engaging in it. Here are the key factors that may determine if tax-loss harvesting may be right for you.
Tax-loss harvesting is a strategy used by investors to reduce their tax liability by offsetting capital gains with capital losses. The idea is to sell losing investments at a loss to offset the taxes owed on any capital gains from winning investments. This can be done by selling individual stocks, mutual funds, or exchange-traded funds (ETFs) that have decreased in value, and then using the capital loss to offset any capital gains from other investments.
For example, if an investor has a $10,000 capital gain from selling a winning stock, and a $5,000 capital loss from selling a losing stock, the net capital gain for tax purposes would be $5,000 ($10,000 gain – $5,000 loss). This means that the investor would only be taxed on the $5,000 net gain, rather than the full $10,000 gain.
One of the key benefits of tax-loss harvesting is that it can help to lower the overall tax bill for investors, not just balance out gains and losses. If an investor has more capital losses than gains, they can use up to $3,000 of excess losses to offset ordinary income each year.
However, tax-loss harvesting is not for all investors. It is generally more beneficial for an investor who has a significant amount of capital gains, is an active or accredited investor, and is in a high tax bracket.
The strategy can also have some drawbacks: If the investor is too focused on the tax advantage, they may sell winning investments and miss out on further gains and can limit an investor’s ability to make decisions based solely on their investment strategy and not on tax considerations, affecting the overall performance of the portfolio. And most of all, it can take a lot of time to diligently execute and can be a complex process.
Tax-loss harvesting is a strategy that can be beneficial for certain investors, but it’s important to weigh the potential benefits against the drawbacks and to consult with a financial professional before making any major decisions with your investments that require diligence and expert knowledge to execute. To get started with a financial professional, contact us at (540) 720-5656.
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Amy Anderson joined the ILG Financial team in 2023 as the client relations coordinator. Her responsibilities include scheduling of appointments, annual check-up notifications, and annuity and required minimum distribution assistance. She is a graduate of Harding University with a degree in Computer Information Systems. Amy and her husband have two children and she enjoys reading, crocheting, music and spending time with her family.
Chase Lopez joined the ILG Financial team in 2020 as an advisor. Chase is a 2016 James Madison University graduate with a degree in management. Chase has been trained under the tutelage of Dave Lopez, who is not only the founder and managing member of ILG Financial, but also is Chase’s uncle and godfather. He also enjoys working alongside his cousin, Megan, who is Dave’s daughter. Chase, as a fiduciary, believes in putting his clients interests first, and building out plans for his clients where they can have a happy and fruitful retirement. He married his beautiful wife in February 2022 and both use most of their free time chasing around their little pup, Aurora.
Jessica Carson joined the ILG Financial team in 2018 as an agent. Jessica and her husband have four children, two dogs, 3 barn cats, 5 chickens, and three parakeets. She indeed loves her children and pets! When not at work, Jessica enjoys playing the piano and cello as well as traveling and spending time outside with her family, hiking, fishing, and boating.
Terri Center joined the ILG Financial team in 2019 as client services manager. She handles client records, application processing, and gathering information to provide a professional and friendly experience with all of our clients. Terri is a graduate of Oakland University. She is married and has two children. She enjoys hiking, family time, and puzzle challenging video games. She also likes to share her creativity in her canvas paintings and sewing projects.
Megan Jones joined the ILG Financial team in 2020 as marketing director. Megan and her husband live in Fredericksburg, VA with their German Short Haired Pointer, Gus. Megan is a graduate of Longwood University and holds a degree in communications. Megan is the oldest of Dave Lopez’s three children and not only enjoys working alongside her father, but also with her cousin, Chase, who joined the ILG Financial team in 2020 as an advisor. When not at work, Megan enjoys sitting on the back porch with family and friends enjoying food and music.