Don’t Leave Tax-Loss Harvesting to the End of the Year
By Douglas Goldstein, CFP®
Many investors optimize their portfolio to minimize capital-gains tax. One popular strategy is to do tax-loss harvesting.
What is tax-loss harvesting?
Tax-loss harvesting is the practice of selling a position at a loss, and matching the loss against a gain of different stock that you sold. By offsetting losses against gains, capital growth taxes are only paid on the net profits. While this may be a tempting tax-savings strategy, there are three reasons to avoid the end-of-the-year market selling frenzy.
The wash sale
If you sell a security and buy it (or a substantially similar one) back within 30 days of selling it is called a “wash sale.” Wash sales negate any tax-loss selling strategies, and your attempt to harvest a tax-loss would be disallowed by the IRS. Don’t be the short-sighted individual who sells at a loss, and then, the next day when the stock begins creeping up, wants a piece of the action and buys it again. This scenario nullifies any potential benefit of tax-loss harvesting, and causes further losses by increasing commission costs.
Impending tax law changes
Selling a position at a loss allows you to offset taxes on potential capital gains in a given tax year. However, since the tax codes are constantly changing you can’t know what your future tax situation will be. If the government raises capital gains tax next year, you may have been better off saving your tax-loss harvesting to use in a year with a higher capital gains tax. Also, for American tax-payers, capital gains tax is different on long- and short-term investments, so the time you originally purchased the security may affect its potential taxes.
Market uncertainty
The uncertainty of knowing when a declining position may reverse itself adds further ambiguity to tax-loss selling. An unrealized loss might actually turn around. But if you sell just to capture the loss, you can’t benefit from the recovery. While tax considerations should come into play when making buy/sell decisions, tax considerations should never be the only reason behind a transaction.
Always ask first
If you are considering tax-loss harvesting, consult both your tax and financial advisors. You should always ask a tax professional before making any decisions that can affect your taxes. Call my office (02-624-2788) if you have any questions about your portfolio.
Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. He is a licensed financial professional both in the U.S. and Israel. His best-selling book, Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing, is available at online, at bookstores, and at www.RichAsAKing.com. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, FSI. Accounts carried by Pershing LLC., Member NYSE/SIPC, a subsidiary of The Bank of New York Mellon Corporation. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
