Reducing Taxes Through Tax Loss Harvesting

November 6, 2017

By Tom Limoges
Trust Investment Officer

“In this world nothing can be said to be certain, except death and taxes” – Benjamin Franklin

As we approach the end of the year, the topic of taxes often arises with clients and this year will likely be no different.  The current bull market in stocks has provided many investors with gains on their investment accounts.  Gains are good, right?  Yes, gains represent the growth in an investment, but if not managed appropriately, gains can present challenges from a tax standpoint.  Tax loss harvesting, if implemented correctly, can reduce realized capital gains. 

Tax loss harvesting is the process of purposely selling an investment at a loss to offset gains incurred in another.  If an investor purchases a stock for $10,000 and it drops to $9,000 in value, the stock can be sold to realize the $1,000 loss and use it to offset gains elsewhere.  Investors can use losses in laggards, this year, such as energy and retail stocks to offset gains in leaders like technology and financial stocks. It is important to note that in the case of mutual funds you may not have sold any of the funds and yet inside the fund, the internal trading may have triggered large gains that will be pushed out at year end. At Security National Bank, we monitor all the mutual funds in any client portfolios and can advise on which may trigger issues for your account. If you have mutual funds at other places, is your advisor doing that for you?

Are there any restrictions to tax loss harvesting?  One important consideration when implementing a tax loss strategy is the Wash-Sale Rule.  If a security is sold at a loss, the tax loss will be disallowed if you buy the same security or “substantially identical” security within 30 days before or after the date you sold.  To maintain the market exposure over the 30 day window, an exchange traded fund (well-diversified ETF) or similar investment can be utilized to remain fully invested. 

Tax loss harvesting is just one of many tax strategies to consider as we approach the end of the year. It is not enough to just make money, rather, it is keeping as much as possible of what you have gained that is critical.  Please speak with your accountant and your SNB Wealth Management advisor for additional ideas to reduce your 2017 tax bill.