Tax-Loss Harvesting: Opportunities and Obstacles
Friday, December 20th, 2024
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With so much of investing outside our control—like market returns or the direction of interest rates—it’s helpful to focus on the tools we can use to our advantage. One of those tools is tax-loss harvesting, a strategy that turns market losses into potential tax savings. When applied thoughtfully, it can help you minimize your tax liability without compromising your long-term investment plan.

That said, tax-loss harvesting isn’t a one-size-fits-all solution. It works best when used intentionally—and only when it aligns with your broader financial strategy.

How Tax-Loss Harvesting Works

At its core, tax-loss harvesting is the process of selling an investment in a taxable account for less than you paid, realizing a loss that can be used to offset gains and reduce your tax bill. You can apply that loss against capital gains in the same year, or carry it forward to future years. In some cases, up to $3,000 of unused capital losses can also be used to offset ordinary income annually.

Once the sale is made, the goal is to stay invested by reinvesting the proceeds into a similar (but not “substantially identical”) security. This maintains your market exposure during the IRS’s 30-day wash sale rule period. After that window closes, you can consider shifting back to your original holding if it still fits your portfolio.

The result? A tax benefit in the near term—without straying from your long-term investment strategy.

When It Makes Sense

Tax-loss harvesting isn’t about reacting emotionally to a down market. Instead, it’s a tactical move—part of a disciplined tax strategy. Here’s when it’s typically most effective:

  • You’re holding positions in a taxable account that are trading below your purchase price.
  • You have capital gains elsewhere in your portfolio or income you’d like to offset.
  • The loss is large enough to justify transaction costs and any other potential trade-offs.

This strategy can be especially useful during years of elevated market volatility—like we’ve seen across multiple asset classes in recent years.

What to Watch Out For

Tax-loss harvesting can be powerful, but it’s not without its complexities. Here are a few key considerations:

Trading Costs

Each round of harvesting usually involves four trades: selling the loss position, buying a temporary replacement, and later reversing those two steps. You’ll want to make sure the expected tax savings are worth more than any transaction or advisory fees involved.

Wash Sale Rule

The IRS’s wash sale rule prohibits deducting a loss on a security if you repurchase a “substantially identical” security within 30 days before or after the sale. That includes buying it in a different account—or even your spouse’s account—so coordination matters.

Market Volatility

If markets swing sharply during the 30-day holding period, your replacement investment could produce a short-term gain, potentially reducing the value of the harvest. That’s why we avoid harvesting during periods of excessive volatility unless we can manage the timing effectively.

Long-Term Tax Planning

Harvesting a loss reduces your cost basis, which could lead to higher capital gains taxes later if the investment recovers. That’s not necessarily a bad trade-off, but it’s something we factor into your broader tax plan before proceeding.

Account Type

Tax-loss harvesting only applies to taxable accounts. Retirement accounts like IRAs and 401(k)s are tax-deferred, so losses and gains inside them aren’t eligible for this strategy.

Making the Most of a Market Downturn

Market declines are never welcome—but they’re a normal part of investing. And when they happen, tax-loss harvesting can be one way to make the most of a less-than-ideal situation.

By realizing a loss in an intentional way, you can potentially reduce your current tax burden and set yourself up for better after-tax returns down the road. Even more importantly, a disciplined tax-loss harvesting strategy keeps your investment plan on track, without letting short-term market swings throw it off course.

Tax-Loss Harvesting is a Tool—Not a Tactic

At Navalign Wealth Partners, we view tax-loss harvesting as one of many tools available to support your financial success. It’s not a strategy we pursue reflexively—but when market conditions and your goals align, it can offer meaningful value.

We monitor client portfolios year-round for harvesting opportunities and coordinate with your tax advisor to ensure everything fits into your larger financial picture.

Have questions about tax strategies, portfolio management, or financial planning? We’re here to help. Let’s talk about how to make the most of every opportunity—losses included.