What is tax loss harvesting? What are the benefits? How might I utilize this strategy in my accounts? These are good questions to investigate for a person experiencing the impacts of declining investment values, who also needs a break at tax time.
Down markets send many investors into a tailspin. Market volatility, however, may be an opportunity to leverage declines for tax advantages.
Tax loss harvesting is a strategy in which an investor sells an investment at a loss, to offset current or future taxable obligations. The proceeds of the sale may then be reinvested into a new, but not “substantially identical” investment, if purchased within 30 days to avoid wash-sales. In other words, the IRS doesn’t allow you to sell your investment at a loss, and then purchase the same exact investment the next day to receive a tax benefit.
Up to $3,000 of realized losses may be applied to offset current income. Capital losses further reduce realized gains on profitable investments in a given tax year. For example, if you’ve locked in $10,000 of capital gains, but have $10,000 of realized losses, you may eliminate your capital gain tax for the year. Excess tax losses can be carried over to be applied in future tax years if needed.
It’s important to note that tax loss harvesting only applies to taxable investments, and isn’t an effective strategy in already tax-advantaged accounts such as Individual Retirement Accounts and 401(k)s.
Consult with your tax professional and investment advisor to discuss the nuances of this tactic for proper implementation and to avoid any pitfalls.
Melissa Knutson, Vice President
Alpine Bank Wealth Management
Products of our Wealth Management service are not FDIC insured, may lose value and are not bank guaranteed.