Taxes may be the last thing on investors' minds given the recent whipsaw nature of global stock markets. While typically an end-of-year discussion, it may be prudent to start talking tax strategy now. Losses can be hard to swallow, but they may also have potential tax benefits. When investors use the losses of one investment to offset the gains of another,1 it is called "tax-loss harvesting."
Market turbulence can be an opportunity to reassess your portfolio. Capitalizing on losses can help offset future gains while also giving you the ability to rebalance your portfolio. Taxes alone shouldn't drive investment decisions. But harvesting losses made in concert with an overall investment plan may ease the future tax-bill sting.
Several brokers announced late last year that they will no longer charge transaction fees for exchange-traded fund (ETF) purchased on their platforms. Also known as NTF (no transaction fees), this move helps make ETFs more cost efficient. Increased cost efficiency is yet one more reason to consider using ETFs when replacing a security sold at a loss.
There are specific rules around tax-loss harvesting—especially when it comes to "wash sales." A wash sale occurs when a security is sold to claim a loss and is then repurchased (or replaced with a "substantially identical" security) within 30 days before or after the sale. The IRS prohibits this transaction type and will negate any potential tax benefits from the sale.
So, it's important to understand how much the holdings of one security mirrors that of another before making loss-harvest purchasing decisions. Download our "Harvest Time" brochure below for a tax-loss harvesting dos and don'ts, and for a framework to assess similarity across various investments.
1 Long- and short-term capital gains are taxed at different rates. Long-term gains may only be offset by longer-term losses. Likewise, short-term gains may only be offset by short-term losses.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
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This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.