Why Taking a Loss on an Investment Can Be a Good Thing

Why Taking a Loss on an Investment Can Be a Good Thing

Why Taking a Loss on an Investment Can Be a Good Thing

 Michael Karmin, CFA,®, CFP®, Wealth Advisor

THE BENEFIT OF TAX LOSS HARVESTING

With a broadly diversified portfolio, it is quite likely that some investments will decline in value from their purchase prices. When this happens, there is sometimes an opportunity to add value to your portfolio through a strategy called “tax loss harvesting.”

Tax loss harvesting works by selling investments whose value is below their purchase price, thereby “harvesting” the loss. Harvested losses can be applied to offset capital gains generated elsewhere in your investment portfolio, as well as up to $3,000 in ordinary income annually. Any losses that cannot be applied in a given tax year can be carried over indefinitely to offset future income and capital gains.

Anyone with earned income or a taxable investment portfolio may benefit from tax loss harvesting. The potential benefit from this strategy depends on your income level and the amount of short and long-term capital gains, but can be substantial. Short-term capital gains rates, which apply to assets held for one year or less, are the same as the marginal tax rate you pay on ordinary income. Long-term capital gains, those realized from investments held for more than a year, are taxed at lower rates that vary based on income level. The rules for applying harvested losses to other gains are somewhat complicated, so a thorough understanding is required.

Tax planning, including loss harvesting, is a component of the year-round investment process that we employ for our clients. We carefully review the performance of the managers that make up our client portfolios, and periodically will sell positions to record a tax loss. If we identify an opportunity to harvest a loss, but still feel that the holding is appropriate for a client portfolio, we will sometimes repurchase the same security after waiting at least 31 days. By waiting 31 days, the owner is not subject to “wash sale” rules that effectively temporarily disallow the harvested losses. We will sometimes also use similar (though not “substantially identical”) replacement securities, such as an exchange traded fund. This approach makes the use of tax loss harvesting even more valuable as we can offset gains from our clients’ investment accounts without altering the strategic positioning of their portfolios.

Effective tax management of portfolios is an important part of a sound investment strategy. While the rules are complex, a myriad of possibilities exist.  Executed properly, tax loss harvesting can significantly benefit the investor experience.  As always, we would be pleased to discuss your specific situation in detail.

Disclosure: 

This newsletter contains general information that is not suitable for everyone. The information contained herein should not be constructed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass.  Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

Strategic Wealth Partners (‘SWP’) is an SEC registered investment advisor with its principal place of business in the State of Illinois. The brochure is limited to the dissemination of general information pertaining to its investment advisory services, views on the market, and investment philosophy. Any subsequent, direct communication by SWP with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of SWP, please contact SWP or refer to the Investment Advisor Public Disclosure website (https://www.adviserinfo.sec.gov).

For additional information about SWP, including fees and services, send for our disclosure brochure as set forth on Form ADV from SWP using the contact information herein. Please read the disclosure brochure carefully before you invest or send money (https://www.stratwealth.com/disclosure-statement).

Date Published: 12/22/2015

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