Merriam-Webster’s definition of harvest is to gather, remove or extract a crop or living cell. In the world of finance, it’s the season to review your potential tax liability for the current year and harvest unrealized losses to offset any realized gains.
Realized vs. unrealized.
A realized gain (or loss) occurs when an asset or investment position is sold. Based on the cost basis (cost of the investment), if the investment grew in value, you incurred a gain. If the investment declined in value, it’s considered a loss. An unrealized gain or loss, however, is the value of an investment position on the date you are referencing, such as a monthly, quarterly or annual statement. The value of the investments at month’s end will reflect whether your account grew in value or lost value. Since the investment has not yet been sold, a real gain or loss has not occurred nor been realized.
If an investment is held less than one year, it is a short-term gain or loss. If the investment is held longer than one year, it is considered long-term. Short-term losses and gains are netted against each other as are long-term. If there are both short- and long-term losses, the short-term losses are used first up to a limit.
Tax loss harvesting occurs when you deliberately sell investments that have declined in value from the date of purchase to offset a gain from another investment incurred in the same year. If the overall loss is greater than the gain, the balance, up to $3,000 (married filing jointly), may be used to offset personal income or may be carried over into future years to help offset realized gains.
Wash Sale.
If an investment is earmarked to be sold at a loss, the taxpayer may not buy or exchange a like position 30 days prior to the sale, nor can that investment or like investment be purchased 30 days after the sale or the IRS will disallow the loss. This is called the wash sale rule. If a wash sale occurs, the loss will not be allowed and will be added back to the cost basis of the new position; therefore, missing the opportunity to realize the loss for that particular year. It may be used in subsequent years if the opportunity is presented.
Tax loss harvesting may be a good strategy, however, it is important to work with both your tax and investment professionals to ensure it is executed appropriately to achieve the desired outcome.
Michele Sarna is a certified financial planner™ with Beacon Pointe Advisors and can be reached at (760) 932.0930 or [email protected].
Provided as information only and should not be considered investment, tax, or legal advice or a recommendation to buy or sell any type of investments. Asset Allocation, portfolio diversification, and risk strategies cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Form ADV contains important information about Beacon Pointe Advisors, LLC, and may be viewed at: adviserinfo.sec.gov.
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