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Your Money, Your Independence Tax Loss Harvesting: Give Thanks And Slice Your Pie

Glenn Brown

Time to give thanks for family, health, pumpkin pie, and finding tax losses in portfolios. 
How can you be thankful for selling something at a loss? Through a strategy called tax-loss harvesting, losing investments can offset realized profits as well as up to $3,000 in non-investment income each year.  
While IRS doesn’t reference “tax-loss harvesting”, there are plenty of rules for the strategy and need to be mindful of Form 8949, Schedule D, and these items:
Know your cost basis. Unless the entire investment was purchased at a single time without dividend reinvestment, then the price is varied. Good news is firms record cost basis and make available online to view before taking action. 
Short-term and long-term capital gains. Short-term is sale of investment owned one year or less and taxed at your ordinary income rate (up to 37%); long-term is sale of investment held more than one year and taxed at either 0%, 15%, or 20% for 2021. 
Important note, it is highly unlikely capital gains rates will remain the same for 2022 as the President wants to raise and Congress has debated not on if, but by how much and for whom. 
Should you solely act on what Congress may do? No, never. Still, if there is an outsized position in either gains or losses, this should be added incentive to take action. 
Back to this year, short-term losses are deducted against short-term gains, next long-term against long-term, then remaining net losses of either type can be deducted against the other. If still more losses can deduct up to $3,000 against income. Still more? Then carry to subsequent years against capital gains and/or $3,000 of income.
Avoid a wash sale. A realized loss is disallowed if, within 30 days of selling the investment (either before or after) you or your spouse invests in something that is identical or “substantially similar” to the one you sold. This is across accounts as well, meaning if you sell something in taxable brokerage and buy it in an IRA, you can’t use the realized loss.  
Value of rebalancing. Have a diversified portfolio based on your risk level and goals in 2009, 2013 or even 2 years ago? If you practice “buy-and-hold”, you’re out of whack. Rebalance back to your target allocation, or economic and market cycles will unmercifully rebalance for you.
Also, cutting losses allows you to reduce outsized winners in your taxable portfolio. And given the last 2 years, there are several large, commonly held names that are outsized. 
More to consider beyond this limited space, including the role of your tax bracket, how to redeploy cash to good use, and opportunity costs. 

To learn more, talk with your tax professional or Certified Financial Planner.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.