🍺The Art of Tax Loss Harvesting

Today's Report: Evaluating The Tax Deferral And Tax Bracket Arbitrage Benefits Of Tax Loss Harvesting by Michael Kitces

• Read the original article here

Cold Poor:

Michael Kitces takes us through the nuances of tax loss harvesting (TLH), a strategy that allows investors to use their losses strategically to reduce taxes and potentially grow their wealth. Here’s what you need to know:

• History of Tax Loss Harvesting: In the early days, investors exploited the tax code by selling investments at a loss and immediately repurchasing them to reduce taxes. To curb this, Congress introduced the "wash sale" rule, disallowing the deduction if the same or a substantially identical investment is repurchased within 30 days.
  

• Tax Alpha vs. Long-Term Benefits: TLH can provide immediate tax savings ("tax alpha"), but it also lowers the investment's cost basis, potentially leading to higher taxes when the investment is eventually sold at a gain. The real benefit lies in reinvesting those tax savings, which can grow over time, effectively deferring the tax hit.
  

• Economic Value of Tax Deferral: The key advantage of TLH is the tax deferral, allowing you to use and invest the tax savings until the gain must be repaid. This deferral can generate modest but compounding economic growth over time.
  

• Tax Bracket Arbitrage: If tax rates change, the benefits of TLH can be even greater. For example, if you’re in a higher tax bracket now and expect to be in a lower one later, the immediate tax savings could outweigh the future tax liability, creating additional wealth.
  

• Impact of Diversification and Timing: The effectiveness of TLH depends on market conditions and your portfolio’s diversification. Regularly monitoring for loss-harvesting opportunities, instead of waiting until year-end, can maximize benefits.
  

• Caveats and Risks: TLH is most effective when there are capital gains to offset. If no gains exist, the losses may carry forward, potentially offsetting future gains that would have otherwise been deferred, reducing the benefit.

My Poor:

Seems like a stupid statement, but it should be said… Tax loss Harvesting can’t be done within your IRA’s or employer tax-advantaged accounts (401k). These accounts already have tax-free or tax-deferred features baked into them. To use TLH you’ll need to do it in a brokerage account. 

Tax loss harvesting is more than just a quick tax break. It’s about long-term strategy—deferring taxes, growing your savings, and potentially taking advantage of shifts in your tax bracket.

If you’ve got investments that aren’t performing well, don’t just sit on them. Consider harvesting those losses and reinvesting elsewhere. Just make sure to avoid triggering a Wash Sale and think about how this move might affect your future taxes.

There are some strategies out there with ETFs that make TLH a no-brainer if you’re in the position to. Read up on it or shoot me an email and we can chat. 

Thanks for reading. Share with a loser who would love to harvest!

Have a great weekend and I’ll catch you next week! 

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