What you should know about tax loss harvesting

Stephen Morgan, December 18, 2019

No one likes to lose. But sometimes, recognizing a loss on an asset can be a winning strategy for taking a bite out of your tax bill. For some investors, tax loss harvesting can help achieve this goal.

 

What you should know about tax loss harvesting

 

How tax loss harvesting works

Under current federal tax laws, investors are typically taxed on capital gains, which are generally considered the profits made when you sell an investment at a higher price than you paid for it.

 

But investors may be able to offset some of those gains by “harvesting” assets — that is, selling them at a loss. For federal income tax purposes, a capital loss occurs when you sell an investment for a price that’s lower than what you spent to buy it.

 

For example, let’s say that a U.S. investor has a $10,000 gain from selling Stock A, and a $4,000 loss from selling Stock B. In this scenario, this investor would owe federal tax on the net gain of $6,000. Without selling Stock B for a loss, the investor in this example would have owed federal income tax on the full $10,000 gain.

 

Under current U.S. tax law, tax loss harvesting may also allow a taxpayer to offset up to $3,000 of ordinary income or $1,500 if a married individual filing a separate return.

 

Tax loss harvesting considerations

Investors interested in tax loss harvesting should be aware of the wash sale rule. According to federal tax law, if an investor sells or trades a stock or security for a loss, that loss won’t be allowed if the investor buys “substantially identical” stock or securities within 30 days before or after the sale. However, the investor could buy a similar asset in order to help maintain their existing portfolio allocations and market exposure.

 

Another aspect to consider with tax loss harvesting is that gains made from selling investments held less than a year are generally taxed at a higher rate than those from investments held more than a year.

 

In addition, tax loss harvesting obviously involves buy and sell transactions, which can incur fees. Tax loss harvesting may also lower your tax basis, which may reduce or nullify any tax advantage compared to holding the asset and selling at a gain later.

 

A strategic approach to tax loss harvesting

It’s important to consult with a tax professional if you’re considering tax loss harvesting as a strategy to potentially reduce your tax bill. In addition, your Hancock Whitney wealth management team can discuss with you the possibility of investing in the tax aware strategies we offer to clients. Please contact your Private Banker for more information on how we can assist you with your financial goals.

 

Talk to a Private Banker

 

 

The information, views, opinions, and positions expressed by the author(s), presenter(s) and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.

 

This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.

 

Investment products and services, such as brokerage, advisory accounts, annuities, and insurance are offered through Hancock Whitney Investment Services, Inc., a registered broker/dealer, member FINRA/SIPC and an SEC-Registered Investment Advisor.

 

Hancock Whitney Bank offers other investment products, which may include asset management accounts as part of its Wealth Management Services. Hancock Whitney Bank and Hancock Whitney Investment Services Inc. are both wholly owned subsidiaries of Hancock Whitney Corporation.

 

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