Loss Harvesting – Making Lemonade | Moneta

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In a market that seems to continue making lemons, how can we make some lemonade?  While current market conditions are wearing on nearly everyone, investment losses provide an opportunity for tax planning this year and in years to come.  We refer to this process as ‘loss harvesting.’

Tax loss harvesting is the process of selling investments in your portfolio that are worth less than you originally paid for them.  These losses can be used to offset other capital gains or up to $3,000 of ordinary income.  Any losses that are not used this year can be carried forward for use in future years.  The expectation of rising taxes in 2009 makes this even more powerful.  (You may not take a tax loss in a retirement plan including IRAs, Roth IRAs, 401(k)s, 403(b)s, etc., so the focus is on only your taxable accounts.)

When considering selling for losses, it is important to be aware of the IRS ‘wash sale’ rule.  This rule requires a 31-day waiting period before you are allowed to repurchase an investment you have sold for a tax loss.  If you repurchase the investment (or one that is “substantially identical”) within 30 days, your tax loss will not be allowed.

As a long-term investor, you may initially be concerned that selling stocks or funds could offset the balance in your carefully crafted portfolio or cause you to miss out on the performance of the market.  Fortunately, Exchange Traded Funds (ETFs) provide access to many areas of the market and can be a ‘placeholder’ until you repurchase your initial investments.

Harvesting tax losses can be a powerful tax planning tool.  However, taxes are only one aspect of your portfolio strategy.  Your Moneta Group Family CFO can discuss your individual situation to see if you might realize a benefit from harvesting some losses in your portfolio.

Jones-Kelli

Kelli Jones, CFP®, CPA, MAcc Kelli is the professional consultant for Pat Duff.