Tax-Loss Harvesting

When life hands you lemons, make lemonade. Let’s make the most of the recent downturn in stocks and look for ways to use tax-loss harvesting to lower your tax bill.

What is tax-loss harvesting? It’s a smart portfolio move where you book paper losses on your investments and reinvest the proceeds to stay invested for when stocks recover. I’ll give you an example.

Say you invested $50k in an S&P 500 Index fund at the recent peak. U.S. stocks are down 10% since then. That means this investment is now worth $45k. Bummer, but that’s part of investing in stocks. They go up most of the time, but not all of the time.

With tax-loss harvesting you can sell your S&P 500 Index fund and realize a $5k loss for taxes. You can’t buy the exact same fund back for 31 days, but you can buy a fund that buys similar types of stocks to keep you invested. Buy another U.S. large cap fund that follows a different index instead. This is still a buy-and-hold strategy and you just reduced your 2018 tax bill.

Let me know if you need help finding a suitable replacement to the funds you’re selling. It is imperative that you stay invested. Nobody knows when stocks will turn around. It’s not worth staying out of the market and missing out on a recovery.

Of course, tax-loss harvesting only works in taxable accounts (individual brokerage, trust, joint, etc.).

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

About the Author: John O’Connor