Tax Loss Harvesting and the Market

Did you sell stock this year from a taxable account? If so, chances are you will have a capital gains tax due in April. Depending upon your income level, that tax rate could be as high as 20 percent (plus an additional 3.8 percent in some cases).

To best manage such capital gains tax burdens, we suggest utilizing a well-established method called tax loss harvesting.

Investors have been using tax loss harvesting since U.S. federal taxes came into existence a little over a century ago. It is a strategy for investors who own stocks or other investments that have gone down in value. By selling securities at a loss by December 31^st, investors can use those losses to offset capital gains on other investments that were sold during the year, plus offset up to $3,000 of income if their capital losses exceed their capital gains.

Many people don’t think about harvesting tax losses until the end of the year. This is often attributable to the psychological impact of taking a loss that had previously only been a loss on paper. Furthermore, many investors retain optimism that the stock will turn itself around before year-end. While these are valid considerations that should be taken into account, enacting a tax loss harvesting strategy before the rest of the proverbial herd jumps into the fray can often yield better investment results.

With most investors selling their losing stocks in December, these stocks and industries often experience downward pressure on their prices. In a year like 2017 where markets are broadly higher, there are fewer opportunities to harvest losses. This means companies with declining stock prices will experience more downward pressure than in a year where stock markets are broadly lower.

On the other hand, investors often avoid selling winning stocks at the end of the year, instead waiting until the new tax year. By waiting until January, investors can defer any capital gains taxes due until the following year. The selling pressure created by an increase in stock selling in January can also cause downward pressure on winning stocks.

Here at Richard P. Slaughter Associates, we look for opportunities to harvest tax losses for our clients starting in fall. If an investor harvests tax losses early enough, they can even take advantage of an end of year dip and rebuy the same securities (just be cautious of the ‘wash sale’ rule, which can disallow capital losses if you purchase a “substantially identical” security within 30 days of sale).

In what could be the last year before a tax cut, it’s wise to consider other ways to lower your tax bill, such as paying property taxes early, making gifts to charity before year end, or accelerating contributions to an IRA or work-sponsored retirement plan. If you’re unsure whether you are taking advantage of tax planning options available to you, consider reaching out to one of our financial planners or your tax planner.