Tax Loss Harvesting

Tax Loss Harvester
Tax Loss Harvester

In the dark skies of a market downturn, there is a silver lining. Tax loss harvesting is the recognition of losses so that you can reduce future tax liabilities either due to rebalancing or capital gains distributions. To save on future capital gains taxes, investors might consider this strategy: 1) Sell the stock mutual funds in your taxable accounts that have declined more than 10% and $10,000; 2) Immediately invest the assets in a substantially different fund, realizing a capital loss; 3) Purchase the original funds back after 31 days from the sale; 4) Report the realized capital losses to your accountant to offset future capital gains and a portion of your income. Losses can be carried forward until they've been offset by future capital gains or income. There are some risks associated with tax loss harvesting, so an investor should consult with their accountant prior to making a decision to tax loss harvest. To learn more, visit ifa.com/tlh.

Figure 12-3

Step 12Tax Loss HarvestingDown MarketSellTaxCapital LossesCapital GainsAccountant.