Photo of Eric R. Ebbert, CFP®, MBA, CEO Eric R. Ebbert, CFP®, MBA, CEO Sep 06, 2020

When you make an investment, you want to turn around and sell them one day for a profit, right? It turns out, there is a reason you may want to sell certain assets at a loss instead.

Of course, your aim when investing should never be to sell at a loss, but when the end of the year is approaching, you can sell certain capital assets to lower your tax liability for the year. This is what is known as tax-loss harvesting.

How does tax-loss harvesting work?

You pay taxes on almost everything. Your savings in tax-deferred retirement accounts, such as a traditional IRA or 401(k), are exempt until you start making withdrawals. However, on everything else, such as stocks, real estate and other assets, you are liable for paying taxes if you make a profit. You can sell some of your investments that lost money to lower your tax liability, which offsets the capital gains you have.

For example, if you have $6,000 in capital gains from the sale of a security, you can sell other assets at a loss to minimize the tax liability from your gains. If you sell at a loss of $3,000, it cuts your capital gains and capital gains tax in half.

If you have never done it before, tax-loss harvesting may seem sketchy or risky, but it is legal and is a very common strategy with serious investors. So much so that many investment platforms offer it as a premium feature. 

Of course, there are some rules when it comes to tax-loss harvesting; as long as you follow them you will be within legal rights to lower your tax liability. For example, you cannot repurchase identical investments for 30 days after selling at a loss. This prevents you from selling to lower your liability one day and turning around to buy them back at the same price the next day right after reducing your taxes. Additionally, you can harvest losses to offset non-investment income up to a total of $3,000. 

Do you need tax-loss harvesting?

As we mentioned before, no one really intends to take a loss on their investments, but it is smart to have a plan for getting the most out of your losses. Toward the end of the year, if you have investments that have lost value, you can sell some of them off to offset your gains and lower your tax liability. 

In other words, if you are serious about investing, you should have a tax-loss harvesting plan in case some of your investments perform poorly and you want to get the most you can out of them.

Talk to a ProVise CFP® professional about investing and tax-loss harvesting

You would not trust your car mechanic to perform heart surgery, nor would you go to your surgeon to change the timing belt in your car. You go to the right professional with the right training and skills for the services you need. Your finances should be no different.

When you need to manage your investments and personal finances, you need to work with a financial professional like our CERTIFIED FINANCIAL PLANNER™ professionals at ProVise Management Group. We can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. 

We also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about tax-loss harvesting and investing? Contact ProVise today to schedule a complimentary consultation.