The stock market’s recent volatility has many investors concerned about their portfolios. However, financial experts say there may be a silver lining: tax-loss harvesting. Tax-loss harvesting is a strategy that involves selling losing investments to offset gains in other parts of your portfolio.
This can help lower your overall tax bill. It’s looking for a silver lining on a pouring, rainy, cloudy day,” said Sean Lovison, a certified financial planner and founder of Purpose Built Financial Services in the Philadelphia area. Lovison said investors should consider tax-loss harvesting opportunities any time there is significant market volatility.
“That should be throughout the year,” he added. The strategy could be especially attractive right now, as the S&P 500 remains down more than 15% from its all-time high in February. The index briefly entered bear market territory, falling more than 20% from its record, due to ongoing tariff uncertainty.
While tax-loss harvesting sounds simple, the current market conditions require a very detailed approach, according to Judy Brown, a CFP at SC&H Group in the Washington, D.C., and Baltimore area.
Tax-loss strategy offsets market losses
After many years of market growth, investment losses might include more recent purchases.
Brown has been busy identifying specific “tax lots,” which are transaction records showing an asset’s purchase date and price. Efficient systems are needed to quickly find and sell those lots for the tax-loss benefits, she noted. One major perk of tax-loss harvesting is that you can sell assets for a loss and then reinvest in similar investments to maintain portfolio exposure.
However, the IRS “wash sale rule” blocks the tax break if you buy a “substantially identical” asset within 30 days before or after the sale. While it is relatively straightforward with individual stocks, there is less IRS guidance on how “substantially identical” applies to mutual funds and ETFs. “If you repurchase the exact same index holding identical funds, that might not pass the [IRS] sniff test,” Lovison warned.
Tax-loss harvesting involves selling losing assets from a brokerage account to offset the gains made from other investments. Once losses exceed profits, they can offset up to $3,000 from regular income annually, with any excess losses carried forward to future tax years indefinitely. Experts emphasize that investors should weigh tax-loss harvesting opportunities any time there is stock market volatility.
With the right strategy and awareness of IRS rules, it can provide a helpful boost to after-tax returns in a challenging market environment.
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