As the end of the year approaches, it makes sense to consider a way to potentially lower the taxes you pay.
It’s a technique called tax-loss harvesting and it’s designed to help you reduce your capital gains taxes by selling assets that have lost value. In recent years there has not been that many opportunities to harvest tax losses as the market has mostly gone up. This year is a different story.
It’s complicated (and not always a good idea), so here are three things you should know:
1. Determine whether you have short-term or long-term gains
If you sold an asset that you held for less than a year, you generated short-term capital gains. And these are taxed at higher rates than long-term capital gains. You want to look at your non-retirement investment accounts.
2. Separate your apples and oranges.
When selling assets for a loss to offset your capital gains, you need to keep apples with apples and oranges with oranges.
Short-term losses are used to offset short-term gains, while long-term losses offset long-term gains.
3. Don’t let your tax bill drive your whole strategy
It’s generally a bad idea to sell assets strictly to harvest a tax loss, especially if those assets still belong in your portfolio.
No one likes paying taxes, but ultimately, your goal is to build wealth – you want to make your investment decisions with that goal in mind.
We can work together to identify the right time to liquidate underperforming investments if and when it makes sense for you.
The Bottom Line
Tax-loss harvesting can be a savvy way to reduce your capital gains taxes, but it needs to be coordinated with your overall planning.
If you would like to discuss whether this strategy is something that is applicable to your situation please schedule a call from our calendar.