Of Course You Should Harvest Tax Losses

I’m not sure why this is any matter of debate, but yes, of course you should be capturing tax losses in your portfolio. For the unfamiliar, it works like this:

  1. If you have investments in an after-tax account that have declined in value since purchased, you can sell them and “capture” the tax loss.
  2. Generally, you can move the proceeds of that sale to a similar (but not identical) investment to maintain some market exposure.
  3. You can first use the value of your captured loss to offset any capital gains in the same year.  This can also apply to business sales and real estate sales along with your investment portfolio.
  4. If the loss exceeds the value of any gains, you can first offset $3,000 of ordinary income with your capital loss.
  5. Unused losses can be carried forward indefinitely, allowing for the unlimited offset of future capital gains and the annual $3,000 deduction against ordinary income.

So here is why capital loss harvesting is the right thing to do.  First, it creates tax deferral in an otherwise taxable environment. If you don’t think tax deferral is valuable, why don’t you loan me $25,000 and I’ll pay it back to you without interest in 10 years. Oh, you like hanging on to your own money? Ok.

Second, it trades a paper loss for a $3,000 deduction against your ordinary income.  For filers in the top tax bracket, that equates to annual federal income tax savings of roughly $1,200.  Not too shabby!  Creating tax savings essentially from thin air.

Arguments against loss harvesting usually involve something akin to “You’re just delaying the inevitable.” To this I will say: of course!  Any basic understanding of the time value of money can help you recognize that paying later is better than paying now. This can hold true even if rates are higher in the future (which I personally believe it is best not to speculate on).

So, yes, you should take your tax losses. Early and often.




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