A number of these steps relate to tax planning and we urge you to consult with your own tax professional prior to moving forward with any tax-driven investment or distribution activities. Especially in the current environment, tax rules change often and it is important to have the latest guidance from a trusted professional. In this post, we want to focus on harvesting gains or losses. The goal of harvesting gains and losses is to proactively manage an investor’s tax liability. For example, an investor may have taken gains earlier in the year and is looking at a significant tax liability on those gains. If the investor holds positions that can be sold now at a loss, those losses may be used to offset the earlier gains, potentially lowering the investor’s tax liability. On the other hand, investors who anticipate facing a higher tax rate next year, may choose to recognize gains this year, so that those gains are taxed at the lower rate for this year.
By reviewing the statements from their investment accounts, investors can determine whether they are currently on track to have net gains or losses for the year. Remember that only non-qualified accounts should be considered in this analysis.
These gains and losses may fall into one of four categories. There are short-term gains, long-term gains, short-term losses and long-term losses. Once the investor had identified the amounts (if any) in the four categories, he/she is ready to sit down with their tax advisor to determine the desired gains or losses to realize during the balance of the year.
It is at this point that an investor benefits from bringing in a financial advisor. The financial advisor can review the investor’s current holdings and assist in identifying the appropriate holdings to liquidate. In addition, investors who need to recognize losses have to be aware of the tax rules governing “wash sales”. These rules require a waiting period before repurchasing a security that was sold at a loss, in order to recognize that loss in the current tax year. A financial advisor can assist the investor by identifying similar investments that maintain the desired portfolio allocation, while permitting the recognition of the loss in the current tax year.
Again, this is only a high-level overview of a complex topic. The main point is that these moves must be completed prior to the end of the year. Investors who are interested in harvesting gains or losses must start working with their tax professional and financial advisor immediately, to make sure they have time to implement their trades. Remember, this is one of the best opportunities provided by the tax code to proactively manage your tax liability.