What Issues Should I Consider When Harvesting Capital Losses?

If you're considering tax-loss harvesting, it's important to evaluate whether it's the right strategy for your individual financial situation. Our checklist is designed to help you determine whether harvesting capital losses is appropriate for your needs.

By working through this checklist, you can better understand the impact that harvesting losses may have on your overall portfolio goals, as well as common pitfalls and rules to be aware of when implementing this strategy.

The key issues covered in the checklist:

The impact on your overall portfolio goals: When considering tax-loss harvesting, it's important to evaluate how it may affect your long-term financial goals. For example, you may need to consider the potential impact on your asset allocation, risk tolerance, and investment objectives.

Common pitfalls and rules to be aware of: Tax-loss harvesting can be a complex strategy, and it's important to understand some common pitfalls and rules to avoid unintended consequences. For example, you should be aware of the "wash sale" rule, which prevents you from claiming a tax loss if you buy a "substantially identical" security within 30 days of selling the security that generated the loss.

The potential tax benefits and consequences: Tax-loss harvesting can provide tax benefits by offsetting gains and reducing your tax bill. However, it's important to understand the potential tax consequences as well. For example, if you harvest losses but later sell the same security for a gain, you may owe more taxes than if you had not harvested the loss.

How it may affect your long-term goals: As mentioned earlier, it's important to evaluate how tax-loss harvesting may affect your long-term financial goals. For example, if you harvest losses in a tax-advantaged account, you may have to pay taxes on gains in the future when you withdraw funds from the account. Therefore, it's important to consider the potential long-term tax implications when deciding whether to implement a tax-loss harvesting strategy.

By understanding these key issues, you can make an informed decision about whether tax-loss harvesting is appropriate for your individual financial situation. Additionally, it's important to work with a financial professional who can help you evaluate your specific needs and provide guidance on the best course of action.

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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.