Tax-loss Harvesting: Timing Matters

Historically, the end of the year has been the quintessential time for investors to look for tax-loss harvesting strategies. Not only does year’s end serve as an ideal time to review portfolios for winners and losers, but it can also help advisors target the exact amount of loss they need to offset capital gains. That’s because you likely have a better picture of your complete tax situation by New Year’s.

But in some cases, it’s worth trying out “non-traditional” approaches—especially when they can add immense value for investors. When it comes to tax-loss harvesting, a slight change in the frequency of this strategy can help provide much-sought-after optimal after-tax returns for investors.

Timing is of the Essence

Author of Think and Grow Rich Napoleon Hill once said, “Do not wait; the time will never be just right.” The same goes for tax-loss harvesting.

As mentioned, tax-loss harvesting is traditionally performed towards the end of the year—namely November and December. But the S&P 500 typically sees its very highest returns in, you guessed it, November and December—a trend that’s been consistent since 1950, according to LPL Financial.

Frankly, waiting until the end of the year may be limiting investors to two of the worst months to harvest losses.

One way for investors to counterbalance this dynamic is to work with their advisors to develop a plan that actively manages their portfolio for taxes throughout the course of the year—not just as an end-of-year exercise. For example, advisors can implement a systematic tax-loss harvesting program, perhaps checking in each quarter or even monthly when significant market losses occur.

Advisors can also review their portfolios for losses more frequently and harvest losses during the course of the year. (After all, they may not be as abundant toward the end of the year, as we’ve seen.) In addition, with the advancement of technology, advisors have many tools to leverage, including automatic notifications when an investment has met a certain loss threshold.

The key here is to be proactive with your advisor. If you know that you frequently experience sizable capital gains, whether due to investment trading or the sale of property, work with your advisor to develop a tax-loss harvesting program that’s tailored to your tax and investment portfolio.

Downsides of Tax-Loss Harvesting

Although tax-loss harvesting remains an important staple in helping investors minimize capital gains, the strategy isn’t always advantageous. Extremely volatile markets or harvesting for minimal losses may only result in a net neutral outcome for your overall returns.

That’s why behavioral finance is such an important (and often-overlooked) part of investing. Falling victim to herd behavior during a volatile market, for example, might mean selling all your securities during a downturn—which might produce the capital losses tax-loss harvesting aims for, but only at the cost of the returns you’d have seen once the market inevitably rallies.

Basis (the cost incurred to purchase the stock) and wash-sale rules can also come into play here. While one of the goals of tax-loss harvesting is to use the proceeds from the sale of the securities that have realized a loss to repurchase additional securities, this strategy can reduce the basis in your securities, which may produce similar capital gains in the future. Likewise, if you repurchase the same or similar securities within 30 days before or after selling them, you lose the immediate tax deduction.

Lastly, remember that additional tax planning strategies can sometimes help negate sizable capital gains in place of tax-loss harvesting. For example, realizing ordinary losses, contributing to an IRA, or donating appreciated assets can all have favorable tax benefits.

Tax-loss harvesting has long proven to be a beneficial strategy to shield against capital gains—and it still is, in many instances. But it’s always important to review your comprehensive arsenal of tax strategies with an advisor. At Felton and Peel, we take a deep dive into your portfolio to determine which strategies make sense for your overall financial health and personal financial goals. Schedule a consultation with us today to get started.

Malik S. Lee, CFP®, CAP®, APMA®
Malik Lee is the Managing Principal of Felton & Peel Wealth Management. A CERTIFIED FINANCIAL PLANNER™ with more than 15 years of financial services experience, he is a Guest Lecturer at Morehouse College, serves on the CFP Board Council of Examinations, and is a Board Member for the FPA of GA.
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