By Marisol Fung, Portfolio Consultant/Team Manager
With year-end quickly approaching, now’s a good time to review taxable accounts for tax loss harvesting opportunities. If an investment has experienced a loss, it can be sold to offset gains and income. Depending on the holding period, the sale will generate a shot-term loss (if held less than a year) or a long-term loss (if held longer than a year).
Gains and losses for similar holding periods are netted against gains and reported on the client’s tax return. Net short-term losses can reduce income up to $3,000 or they can be carried forward (along with long-term losses) for future tax returns. Research has shown that tax loss harvesting strategies can provide incremental after-tax returns in client portfolios.
It’s important to note the IRS wash rule disallows losses if the same investment is purchased within 30 days. Similar asset classes can be purchased as long as it’s not the same position.
As an example, your client holds SPY with a $10,000 loss. You can sell SPY and harvest the loss and then invest the proceeds into VOO. The client will still have exposure to the S&P 500 via a different investment. Additional capital gains information regarding IRS rules on can be found here.
Tax loss harvesting can take place at the investment level or via individual lot selection. If a position has an overall gain, but there are specific lots that have losses, those lots can be identified at the time that the trade is placed. For advisors interested in tax loss harvesting, there is an Orion data query that can facilitate the process: Query ID 22639 – Dynamic – Rep Level Tax Loss Harvest will identify all lots within taxable accounts that have losses. Results from the query can be exported into Excel and sorted as needed.
Dynamic will review tax loss harvesting opportunities for model positions in accounts they manage. Dynamic will contact advisors if losses exceed the greater of $20,000 or 10% of the position, depending on other factors and considerations.
Should you have any questions about tax loss harvesting, please contact the Portfolio Management Team at 877-257-3840 ext. 7 or firstname.lastname@example.org.