RL145 — Tax loss harvesting strategies
On the Retirement Lifestyle Show, Roshan Loungani, Eric Olson, and Adrian Nicholson break down the dos and don'ts of tax loss harvesting. They discuss the benefits of tax loss harvesting, times when tax loss harvesting makes sense, and the mechanics of the wash sale rule.
[00:00] Introduction
[02:25] What is Tax Loss Harvesting
[04:08 Benefits of Tax Loss Harvesting
[07:40] The two types of tax rates available in the US
[10:50] Factors Affecting Tax Loss Harvesting
[12:51] Addressing Unrealized Losses in a Non-Qualified Account
[17:10] How Are Capital Gains Vs. Ordinary Income Taxed?
[18:15] The Mechanics of Tax Rate Arbitrage
[20:10] Understanding the Wash Sale Rule
[27:51] Times When Tax Loss Harvesting Makes Sense
[34:14] Reasons Not to Try Tax Loss Harvesting
[37:00] Parting Thoughts
For more links and the full show notes keep scrolling down!
Roshan Loungani can be reached at roshan.loungani@aretewealth.com or at 202-536-4468.
Erik Olson can be reached at erik.olson@aretewealth.com or 815-940-4652.
Adrian Nicholson can be reached at adrian.nicholson@aretewealth.com or at 703-915-8905.
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Full Show Notes:
What is Tax Loss Harvesting?
Taxes: As much as we can't avoid them, the good news is that they can be managed. So, what is tax-loss harvesting, and how can it help you keep more of what you earn? Well, tax-loss harvesting is a framework designed to reduce an investor's overall tax bill so they can keep more of what they earn from their investments. It works when a person sells investments at a loss and uses those losses to offset the capital gains from investments that were sold at a profit. For example, say an investor buys a stock at $400 and sells it for $500, they will have realized a capital gain of $100. This gain automatically triggers a capital gains tax. However, if the same investor sells another stock at a $100 loss, they can use those realized losses to offset the gains from selling the other profitable stock. As a result, the realized gains are reduced, and the investor's overall tax bill is lowered.
Understanding the Wash Sale Rule
Besides reducing taxes, tax loss harvesting also frees up cash for you to invest in new assets more likely to generate better performance. If you're like most investors, you'll probably want to buy a similar investment to guarantee your risk profile remains unchanged. However, certain rules apply when navigating your next purchase. For example, you can't sell a stock to realize a loss and then rebuy that exact same stock - or even one that's nearly identical less than a month later. This strategy is called the wash sale, and the IRS has measures in place to counter such activities.
Links and Resources:
S.E. Chaudhuri, T.C. Burnham, and A.W. Lo, 6/30/2020, “An Empirical Evaluation of Tax-Loss-Harvesting Alpha,” Financial Analysts Journal: https://www.cfainstitute.org/en/research/financial-analysts-journal/2020/0015198X-2020-1760064
Ben Henry-Moreland, 7/13/2022, "Why Tax-Loss Harvesting During Down Markets Isn’t Always A Good Idea": https://www.kitces.com/blog/tax-loss-harvesting-market-downturn-capital-gains-rate-tax-bracket-arbitrage/
Ben Henry-Moreland, 9/7/2022, "Tax-Loss Harvesting Best Practices (And How To Scale It Across A Client Base)": https://www.kitces.com/blog/tax-loss-harvesting-best-practice-scaling-execution-challenges-wash-sale-rules/
Ben Henry-Moreland, 10/5/2022, "Automated Tax-Loss Harvesting Technology: Is The Value Overstated?": https://www.kitces.com/blog/automated-tax-loss-harvesting-technology-software-value-risks-gaps-benefits/
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