Harvesting Losses, Boo! – I prefer Tax Efficiency Reaping…

I have always disliked the name of a very beneficial strategy – “Tax Loss Harvesting.” To me, it has a negative connotation. So where did the phrase harvesting losses come from?

The term "harvesting losses" draws its inspiration from agricultural practices, where the concept of "harvesting" generally refers to the gathering of mature crops from the fields. In the context of financial planning and wealth management, "tax loss harvesting" implies a similar action: you're "gathering" losses from your investment portfolio for a specific purpose, namely, to offset capital gains elsewhere and reduce your overall tax liability.

The term serves as a straightforward metaphor to explain a somewhat complex financial maneuver, making it more approachable for investors who may not be experts in tax law or financial planning. It's also likely that the term gained popularity because it encapsulates both the action (harvesting or selling off assets) and the goal (realizing a loss for tax benefits) in a neat, easily understood way.

I prefer focusing on the positive – so let me suggest Tax Efficiency Reaping. I doubt it will stick but why not try?

Tax Efficiency Reaping is a financial planning strategy often employed by financial advisors and wealth management professionals to optimize a portfolio's after-tax performance. As we transition from summer to fall and approach year-end, we're reminded of the agricultural cycle of sowing and reaping, which in a financial sense can be analogous to Tax Efficiency Reaping. Just as farmers reap the benefits of their crops—like pumpkins—from harvesting in the fall, investors can "harvest" investment losses to offset gains and reap the benefits of reduced tax liability. However, unlike farmers who primarily harvest in one season, tax loss harvesting is something that at Members’ Wealth we evaluate portfolios year -round for reaping opportunities, where appropriate.

How to Do It

To implement, you'll need to first identify investments in your portfolio that have decreased in value since you purchased them. You then sell these investments to realize the losses. The losses can be used to offset capital gains, and if the losses exceed your gains, they can even be used to offset a limited amount of ordinary income. After selling, you can reinvest the funds into similar but not identical assets to maintain your asset allocation. The objective is to eventually recover the loss while also gaining the tax benefit.

Benefits

Taking losses offers multiple advantages:

1. Capital Gains Offset: Realized losses can offset realized gains, reducing your tax liability.
2. Income Offset: Up to $3,000 of net capital losses can be used to offset ordinary income.
3. Portfolio Rebalancing: It provides an opportunity to rebalance your portfolio, aligning it with your investment goals.

Things to Be Concerned About

Before implementing this strategy, here are some considerations:

1. Wash-Sale Rule: The IRS disallows a loss deduction from the sale of a security if you buy a "substantially identical" security 30 days before or after the sale.
2. Transaction Costs: Be aware of the costs associated with selling and buying investments.
3. Impact on Long-Term Strategy: Ensure that tax loss harvesting does not compromise your long-term investment goals.

Fall: A Seasonal Reminder

As you watch leaves fall and pick pumpkins this season, let it be a reminder of the value in pruning, harvesting, and reaping in your financial life as well. Always consult with your accountant and financial advisor and consider other tax implications before taking action. Effective tax efficiency reaping requires a coordinated effort involving financial planning, tax planning, and wealth management.

About the Author – Dane Czaplicki, CFA®

Dane Czaplicki is CEO of Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Dane and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs, and is determined to put service before all else.

Dane received his MBA from The Wharton School of Business at the University of Pennsylvania and his bachelor’s degree from Bloomsburg University. Outside work, he enjoys spending time with his wife and kids, hiking and camping, reading, running, and playing with his dog. To learn more about Dane, connect with him on LinkedIn.

To get in touch with the Members’ Wealth team today, I invite you to email info@memberswealthllc.com or call (267) 367-5453. 

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