Now is the time, for the 2024 tax year, to take a good look at your non-qualified, taxable investment accounts to consider tax loss harvesting strategies for your portfolios. Effective tax loss harvesting can help increase the Tax Alpha for your investment portfolio. A positive Tax Alpha impact on investment performance occurs when capital gains tax is avoided or delayed.
Investors should avoid capital gains taxes that will be due next year on April 15th. Every non-qualified investment portfolio has unrealized gains and losses. The key to effective tax loss harvesting is to take an inventory of your investment positions to determine whether it makes sense to sell investment positions with unrealized losses, in order to reduce net realized capital gains for the tax year. The tax benefits can be significant when investors have significant realized gains with unrealized losses in their portfolio. Transactions costs should always be considered when making tax loss harvesting decisions.
During 2024, there was significant divergence in the performance of different sectors of the stock market. For example, NASDAQ 100 and Artificial Intelligence-related stocks have performed well, while much of the S&P 500 stocks has experienced a divergence in performance, due to Federal Funds rate increases and expectations of a slowing economy. Perhaps this disparity in sector performance has created an opportunity to harvest tax losses to offset realized investment gains.
Some financial advisors think that tax loss harvesting violates the investing axiom of “buy low and sell high” through the forced sale of securities that have declined. Some financial advisors think the benefit of tax-loss harvesting simply results in the deferral of taxes, at best. This may be correct, however this author posits, on a present value basis, the longer you can defer taxes the more a positive portfolio Tax Alpha can create greater wealth.
Capital Gains Taxation
To calculate capital gains taxation, long-term losses on securities held for more than a year are netted first against any long-term capital gains, while short-term losses on the sale of securities held for less than a year get applied to short-term gains, then net long and short term capital gains are taxed with net short term gains taxed at the higher ordinary income tax rate and net long term gains at the lower capital gains rates that apply, depending on your marginal tax rate. Any excess net capital losses can be deducted, up to $3,000 per year, against ordinary income, including portfolio income. Any excess net capital gains losses above $3,000 can be carried forward to future tax years to reduce capital gains or ordinary income until the remaining capital losses are used.
Wash Sale Rule
In order for realized capital loss transactions to qualify for a tax deduction against the capital gains, investors cannot repurchase a “substantially identical” security within 30 days after the sale transaction. In order to maintain your investment portfolio’s diversification and expected investment performance, a proxy can be used to maintain exposure to the investment prospects of the security sold. Potential investment proxies which qualify would be securities issued by competitor companies or exchange traded funds in the same sector. These securities would be expected to correlate closely with the performance of these securities reducing the opportunity cost from tax loss harvesting.
At True North Financial Advisors, our firm provides personalized financial planning and investment advisory services, located in Boynton Beach, Florida . For help with a personalized financial planning experience we provide a web-based platform which is easy for clients to upload and organize their financial information on their own Personal Financial Website — largely without any assistance. To learn more call 855-377-7526 for assistance.
This is a hypothetical example used is for illustrative purposes only.
This article should not be considered as personalized tax advice.
You should seek the guidance and advice of your professional tax advisor.
