Why Taking a Loss on an Investment Can Be a Good Thing

THE BENEFIT OF TAX LOSS HARVESTING

With a broadly diversified portfolio, it is quite likely that some investments will decline in value from their purchase prices. When this happens, there is sometimes an opportunity to add value to your portfolio through a strategy called “tax loss harvesting.”

Tax loss harvesting works by selling investments whose value is below their purchase price, thereby “harvesting” the loss. Harvested losses can be applied to offset capital gains generated elsewhere in your investment portfolio, as well as up to $3,000 in ordinary income annually. Any losses that cannot be applied in a given tax year can be carried over indefinitely to offset future income and capital gains.

Anyone with earned income or a taxable investment portfolio may benefit from tax loss harvesting. The potential benefit from this strategy depends on your income level and the amount of short and long-term capital gains, but can be substantial. Short-term capital gains rates, which apply to assets held for one year or less, are the same as the marginal tax rate you pay on ordinary income. Long-term capital gains, those realized from investments held for more than a year, are taxed at lower rates that vary based on income level. The rules for applying harvested losses to other gains are somewhat complicated, so a thorough understanding is required.

Tax planning, including loss harvesting, is a component of the year-round investment process that we employ for our clients. We carefully review the performance of the managers that make up our client portfolios, and periodically will sell positions to record a tax loss. If we identify an opportunity to harvest a loss, but still feel that the holding is appropriate for a client portfolio, we will sometimes repurchase the same security after waiting at least 31 days. By waiting 31 days, the owner is not subject to “wash sale” rules that effectively temporarily disallow the harvested losses. We will sometimes also use similar (though not “substantially identical”) replacement securities, such as an exchange traded fund. This approach makes the use of tax loss harvesting even more valuable as we can offset gains from our clients’ investment accounts without altering the strategic positioning of their portfolios.

Effective tax management of portfolios is an important part of a sound investment strategy. While the rules are complex, a myriad of possibilities exist.  Executed properly, tax loss harvesting can significantly benefit the investor experience.  As always, we would be pleased to discuss your specific situation in detail.

Categories

This newsletter contains general information that is not suitable for everyone. The information contained herein should not be constructed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass.  Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

Strategic Wealth Partners (‘SWP’) is an SEC registered investment advisor with its principal place of business in the State of Illinois. The brochure is limited to the dissemination of general information pertaining to its investment advisory services, views on the market, and investment philosophy. Any subsequent, direct communication by SWP with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of SWP, please contact SWP or refer to the Investment Advisor Public Disclosure website (https://www.adviserinfo.sec.gov).

For additional information about SWP, including fees and services, send for our disclosure brochure as set forth on Form ADV from SWP using the contact information herein. Please read the disclosure brochure carefully before you invest or send money (http://www.stratwealth.com/legal).

Financial Planning
Cloudy Crystal Ball
As we start the new year, especially after a challenging 2022, the most frequent question we are asked is: What is your prediction for 2023? Admittedly, our crystal ball is cloudy. It always has been and always will be when it comes to short-term predictions. Still, there is no shortage of “experts” – supported by research, sophisticated models, and persuasive reasoning – that routinely broadcast what’s in store for the next twelve months. The harsh reality: it’s fool’s gold – entertaining but rarely actionable.
Read More
Investments
A Closer Look at Private Markets
As you are likely aware, ongoing volatility and rising interest rates made 2022 a very challenging year in the capital markets. We believe that this past year has highlighted the need for advisors to explore investment opportunities that exist beyond the traditional stock and bond markets. The private markets are one such opportunity set. In this article, we discuss what the private markets are, how these investments may fit into a diversified portfolio, and how we use them.
Read More
Current Events
What We Have Been Reading – Market Commentary & Beyond
Our team regularly reads articles from industry peers and trusted resources to stay up to date on financial markets. We enjoy reading about topics related to economics, investments, current events, and financial planning. In addition to circulating some of the best pieces internally, we thought our clients, partners, and friends might enjoy reading some of the same articles as us. We received great feedback on the articles we circulated in the first two quarters of 2022, so we wanted to follow up with some more! Here are eight recent pieces that our team members have read, along with some commentary on why we found the respective articles interesting.
Read More