Tax-Loss Harvesting: Decreasing Your Tax Liability While Enhancing Your Portfolio

Investment and Asset Management

From January 1, 1998, to January 1, 2023, the S&P 500 provided a total return of 546% or 7.75% on average/ year, given any and all
dividends & other cash distributions were reinvested.

If your portfolio even approximately kept pace with the market, you probably have a number of holdings with unrealized or paper gains.
However, by selling any of your holdings, you would realize these gains and incur a tax liability. You’ll be taxed on positions you’ve held for more than a year at capital gains rates which, as of 2023, are 15%/20%, depending on your annual income.

Conversely, 2022-2023 saw the S&P 500 ending with a total return of -12% resulting in many new investors’ portfolios currently at an unrealized loss. Tax-Loss Harvesting is a strategy that can be used to both offset the gains you’ve achieved overtime as well as banking current losses to accomplish the reduction or even elimination of current/future tax liabilities.

What does Tax-Loss Harvesting entail?

Perhaps the best way to explain how Tax-Loss Harvesting works is to offer an example.

Imagine you are in the 35% tax bracket and are subject to a 20% capital gains rate. You own a position that has appreciated $15,000 from the time you purchased it several years ago. In other words, you have an unrealized gain of $15,000.

By liquidating the position, you will realize your $15,000 gain and owe the IRS 20% or $3,000.

Now imagine you also own a position that has declined in value by $16,000 over the past several years. By selling that holding, you will have realized a loss that you can use to offset the realized gain on your other position. You will also have $1,000 leftover that you can use to offset gains on other positions or even ordinary income (losses may be used to offset up to $3,000 in ordinary income per year. Losses over that amount may be carried forward for use in subsequent years.)

The result?

Without Tax-Loss Harvesting	With Tax-Loss Harvesting	Amount Left Over to Offset Other Realized Gains or Ordinary Income
Gain from sale of fund or stock: $15,000	Gain from sale of fun or stock: $15,000	$1,000
Tax owed: $3,000	Loss from sale of other fund or stock: $16,000	Once you've used losses to offset gains, you are allowed to offset up to $3,000 in ordinary income per year. Losses above that amount may be carried forward for us in subsequent years.
Based on long-trem capital gains rate of 20%	Tax owed: $0

By working with your Lenox Advisor you can:

Identify positions with unrealized gains that you should think about realizing.
Identify positions with unrealized losses that you should think about selling to offset gains.
Liquidate positions that no longer appear favorable and replace them with holdings that offer more potential.

In short, Tax-Loss Harvesting can present an opportunity to not only reduce taxes but align your portfolio with prevailing market conditions.

Planning your losses

Some financial firms promote year-end tax planning every autumn. With just a few months left in the year, investors can identify positions with unrealized losses, sell those positions and realize losses that they can use for tax purposes. The problem with this strategy is timing. Investors and their advisors only have a brief period of time to determine which holdings to sell at a loss so they can offset gains they’ve already taken earlier in the year.

That’s why at Lenox Advisors, we advocate year-round management of tax losses so you can draw on them as you need them. By doing so, you can make your investment decisions solely on the basis of whether an individual investment is a viable candidate for future growth, not on whether selling it would trigger a taxable event.

Watch out for wash sales

Suppose you really like a stock in your portfolio, even though it has declined in value since you originally bought it. Can you sell it to generate a loss and buy it back the next day?

Not so fast

Wash Sale rules prohibit investors from buying a substantially identical holding to the one they sold for 30 days before or after their sales date. Failure to adhere to this rule will mean that your loss will not be recognized for tax purposes. However, you can:

Buy stock in the same industry or economic sector, if you wish to maintain the characteristics of your portfolio.
Wait until the 30-day Wash Sale period ends before buying back your stock.

There’s one more important tip to consider: you can’t sell a stock or other security at a loss for tax purposes and buy it back in another account, even in an IRA, during the 30-day period. You will run afoul of Wash Sale rules and your loss will be disallowed for tax purposes.

Taking a loss is not conceding defeat

Tax-Loss Harvesting doesn’t necessarily involve selling security and placing the proceeds in cash until market conditions improve. You are continuing to put your investment dollars to work in a security that resembles the security you sold. Plus, you are generating a loss for tax purposes that can increase the net after-tax return of your portfolio. To learn more about Tax-Loss Harvesting and which securities in your portfolio might be viable sales candidates, consult with your Lenox team.

The information provided is not written or intended as specific tax or legal advice. Lenox Advisors, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC, Member SIPC. Lenox Advisors, Inc. (Lenox) is a wholly owned subsidiary of NFP Corp. (NFP), a financial services holding company, New York, NY. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 90 Park Ave, 17th Floor, New York, NY 10016, 212.536.6000. Fee based planning services are offered through Lenox Wealth Advisors, LLC (LWA), a registered investment adviser. Services will be referred by qualified representatives of MML Investors Services, LLC (MMLIS). LWA is a subsidiary of NFP and affiliated under common control with Lenox. Lenox, LWA and NFP are not subsidiaries or affiliates of MMLIS, or its affiliated companies.

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