Tax Loss Harvesting is a subject that usually comes to the minds of investors’ right before the end of the year when they start thinking about taxes. While that is fine, we like to be a bit more tactical in finding the right opportunities to harvest losses throughout the year. Investments can be volatile and it’s entirely possible that an opportunity to harvest losses may arise earlier, only to disappear before year-end. It is of course preferable to have a loss disappear because you’ve either made money or broken even. Nevertheless, there is some strategy involved in finding an asset with a short-term loss, selling that asset, and buying another in its place in order take advantage of the tax deferral. This strategy can work to your advantage, when used at the right time.
Choosing the right opportunities to harvest losses will depend on each investor’s personal situation. What may be a great opportunity for another investor may not be the best for you. This is why throughout the year, Pinnacle’s Investment Team helps our Wealth Managers identify short-term losses in the portfolio that may be harvested and replaced with proxy assets. Our investment models hold mostly ETFs, so we typically look for a proxy ETF that is similar enough in correlation to the one being sold, but not “substantially identical.” This is very important as it keeps our clients invested while also avoiding the wash-sale rule.
[The wash-sale rule prohibits taxpayers from claiming losses on the sale/trade of a security when they purchase a “substantially identical” security within 30 days of the original sale.]
The other option is to wait 31 days and accept the risk of losing out on market performance. In most cases we prefer that you stay in the market: Making money while also deferring taxes is much better than taking a loss to reduce your current tax bill and then staying out of the market altogether.
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