WTF Friday (aka Jargon Alert —and Year-End Tax Talk Bonus!): Tax Loss Harvest

By Patrick Diamond, CFP®

Tax-loss harvesting is a strategy used in taxable investment accounts to reduce your year-end capital gains by selling investments—such as ETFs or individual stocks—that are currently trading below your purchase price. Said more simply… it’s a way to lower your tax bill.

When you sell an investment at a loss, that loss can be used to offset capital gains realized elsewhere in your taxable portfolio, potentially lowering your overall tax bill. For example, if you took profits on a position earlier in the year, “harvesting” a loss by selling in another position that has an unrealized loss (thereby realizing the loss) can help neutralize the tax impact because capital gains and losses can offset under tax rules. Investors often reinvest the proceeds into a similar (but not “substantially identical”) investment to maintain market exposure while still realizing the tax benefit.

It’s important to note that tax-loss harvesting only applies to taxable investment accounts. It cannot be used in retirement accounts—also known as qualified accounts—such as traditional IRAs, Roth IRAs, or 401(k)s, because gains and losses inside these accounts are not taxed annually. Since withdrawals from these accounts are taxed differently (or, in the case of Roth accounts, gains are not taxed at all), the IRS does not allow investors to claim losses within them. We always keep an eye on tax-loss harvesting opportunities for our clients to help lower their tax bill as part of a tax-smart planning and investing strategy.

*Disclaimer: This blog post is for educational and informational purposes only and does not constitute tax, investment, or legal advice.