7 things to remember about Tax Loss Harvesting

By James Viceconte, Head of Investment Product

James joined Citizens Securities Inc. in 2022 and is responsible for the curation and management of the investment product suite of ETFs and Mutual Funds, and portfolio models constructed with these products. As a strategic partner, he has over 30 years of experience in financial markets focused on a broad array of public and private equity and fixed income products.

"Tax Loss Harvesting” is a strategy that can enable you to take losses on securities positions that are trading below their cost basis. These losses can be used to offset gains realized on other investments, now or in the future. Because you are only paying taxes on net gains realized, this approach can result in a lower tax bill and higher after-tax returns. This strategy is not applicable in a traditional 401k, IRA, or any other tax-advantaged investment account – it can only be utilized in a taxable brokerage account.

1. Proceeds from the sale of the position with the loss being realized, or harvested, can be reinvested in a similar security or fund. For example, an exchange traded fund (“ETF”) tracking the S&P 500 could be sold and replaced with another ETF tracking a similar index. Similarly, an ETF tracking a broad exposure to international developed equities can be sold and replaced with a broadly similar ETF from another asset manager.

2. The security or fund sold can be repurchased after 30 days to avoid a wash sale violation. A wash sale occurs when the security sold for tax loss purposes is repurchased within 30 calendar days. A wash sale voids the use of the loss for tax purposes and resets the clock on the required 30-day waiting period for repurchasing the security.

3. Up to $3,000 of losses not utilized in the current tax year against other investment gains can be deducted against ordinary income.

4. Any capital losses not used to offset other capital gains or against $3,000 of ordinary income in the current year can be carried forward to future years indefinitely.

5. Harvested losses can be used against other capital gains from unrelated asset sales, such as the sale of a business or real assets. For example, if a business is sold and a capital gain is realized, then capital losses realized in an investment portfolio can be used to offset that gain for tax purposes.

6. There are restrictions on using specific types of losses to offset certain gains. A long-term loss would first be applied to a long-term gain. A short-term loss would be applied to a short-term gain. But if there are excess losses in one category, these can then be applied to gains of either type.

7. You must follow IRS rules to use this technique properly and legally. Citizens Securities Inc. (“CSI”) does not provide tax advice and we recommend that you consult a tax advisor to assess your specific situation.

While there are very few circumstances in which you would not want to harvest available losses to save on taxes due, now or in the future, we recommend that you discuss your long-term goals with your tax advisor. While tax loss harvesting may offer short-term benefits, it’s important to make sure that you are still able to reach your long-term financial goals while keeping your portfolio diverse.

Tax loss harvesting is a useful tool that can help potentially optimize your investment returns by minimizing your tax liabilities. CSI and our financial advisors can help answer any questions you may have about tax loss harvesting. To find a CSI Financial Advisor near you, click the button below.

Capital Gain – The increase in the value of a capital asset when it is sold. Put simply, a capital gain occurs when you sell an asset for more than its original cost basis.

Capital Loss – The loss incurred when a capital asset, such as an investment or real estate, decreased in value below its original cost basis. This loss is not realized until the asset is sold for a price that is lower than the original purchase price.

Cost Basis – The original value of an asset for tax purposes, specifically the purchase price, adjusted for stock splits, dividends, and returns of capital distributions. This value is used to determine the capital gain or loss, which is equal to the difference between the asset’s cost basis and the current market value.

Long-term Gain – The gain or loss stemming from the sale of a qualifying investment that has been owned for longer than 12 months at the time of sale. Long-term capital gains are often given more favorable tax treatment than short-term gains.

Ordinary Income – Any type of income earned by an organization or an individual that is taxable at ordinary rates. It includes but is not limited to wages, salaries, tips, bonuses, commissions, rents, royalties, short-term capital gains, unqualified dividends, and interest income.

Real Assets – Physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources.

Realized Gain – Results from selling an asset at a price higher than its cost basis.

Realized Loss – Recognized when assets are sold for a price lower than its cost basis.

S&P 500 – S&P 500^® Index is a widely recognized measure of U.S. stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large cap segment of the US equities market. You cannot invest directly in an index.

Short-term Gain/Loss – A gain or loss realized from the sale of personal or investment property, a capital asset, that has been held for one year or less. These gains are taxed as ordinary income, which is your personal income tax rate.