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Capitalize on Market Downturns with Active Tax Loss Harvesting

Capitalize on Market Downturns with Active Tax Loss Harvesting

April 27, 2020

The practice of tax loss harvesting (TLH) – or selling an asset at a loss to offset a gain and therefore reduce your taxable income – is growing in popularity. Advisors who implement TLH in client portfolios most often do so at year-end, but market volatility like we experienced in the first quarter of 2020 presents greater opportunity for greater financial advantages. 

Here’s an example of how year-end TLH might work:

Your investment portfolio amasses $15,000 in total capital gains over the course of a year. So, we sell an investment that was down $15,000 relative to its original purchase price to offset that gain bringing your net gain to zero. We then use the $15,000 proceeds to invest in a very similar investment to maintain our target exposure.

That’s a great benefit for your portfolio: to maintain similar investment funds while avoiding paying unnecessary taxes on capital gains – gains that might only be short term. However, if TLH only takes place annually, you might be missing additional opportunities to minimize future tax liabilities.

Swift, significant drawdowns in the market are more likely to produce losses on your returns. Therefore, they offer more potential to offset future gains and accrue tax losses for future years. Because TLH doesn’t merely allow you to use losses to offset a gain in that calendar year but also to apply up to $3,000 toward ordinary income on your next tax return. Losses over $3,000 can be carried forward and written off in future years – meaning TLH benefits can accumulate and lower your tax burden for many years to come.

Here’s how active TLH benefited our clients recently:

Of the nearly one-quarter of $1 billion Carey & Hanna advises, there was roughly $29 million in managed, taxable equity client accounts at quarter’s end 2020.

Year-to-date (as of April 9, 2020), the total realized – meaning we sold and swapped – was $4.17 million. Thanks to active TLH strategy, which capitalized on recent market volatility, we helped clients save nearly $1 million in future tax liability – or nearly 3.5% per account! That’s almost like adding an extra return of 3.5% after-tax by lowering future taxes.

Annual tax loss harvesting is great. Active tax loss harvesting throughout the year is better. Because you never know what the market will do next, how your income might change, or when you’ll need to tap into those stored-up tax losses in the future.