Tax-Loss Harvesting Mistakes

Full Transcript:

Capitalizing on a great strategy requires proper execution. Today, I’ll cover three mistakes investors commonly make with tax-loss harvesting.

One way to lower your tax bill is to perform tax-loss harvesting. Selling investments that are loss, realizing those losses, and using those losses to offset other realized gains. If your total realized losses exceed your total realized gains, you can also offset up to $3,000 of income each year. Doing this can be very beneficial when done correctly. Let’s talk about three mistakes investors commonly make when performing tax-loss harvesting.

The first one is having a short-term mindset. With tax loss harvesting, you are generally deferring taxes, not eliminating them. If you defer taxes to you when you’re in a higher tax bracket, you’re going to end up paying more in taxes, not less.

The second common mistake is sacrificing returns to minimize taxes. Before you sell an investment, you want to know what you’re going to do with that money. For example, if you sell an investment and then you’re sitting in cash, you are reducing your time in the market, increasing the chance that you miss the market rebound.

The third mistake that investors commonly make is triggering what is known as a wash sale. A wash sale happens when you sell a security at a loss and then buy a substantially identical security within 30 days of that sale.

For example, if you have tech stock A and you sell that at a loss and then within 30 days you go buy tech stock A again, that loss will be disallowed by the IRS. One way to avoid a wash sale is to buy a different security that still meets that investment purpose. For example, once you sell tech stock A, go buy tech stock B or go buy an ETF that covers the technology sector. By doing this, you are meeting your investment objectives while still minimizing taxes.

As the market has gone down for a lot of the year, I encourage you to look at your investment portfolio right now to see what opportunities you have for tax-loss harvesting, and then implement a systematic process for effectively capitalizing on them.