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Tax-Loss Harvesting: Playing “The Glad Game”
In the Disney movie “Pollyanna,” Pollyanna was taught by her father that in “every situation, no matter how bad it might seem, you could always find something to be glad about if you looked hard enough.” Every day they played “The Glad Game.”
As we near the end of 2022, with many of the indices and asset classes down more than 10%, an important strategy to consider is tax-loss harvesting. Tax-loss harvesting involves realizing losses on investments that have declined in value to offset capital gains taxes you may owe from gains you have realized in investments that increased in value.
If your capital losses for the year are greater than your capital gains, you may be able to apply up to an additional $3,000 of losses against wage income or investment income. Another option to consider is, if losses exceed $3,000 is to carry them forward indefinitely to offset future gains for federal tax purposes (State tax rules may vary).
A nice example to illustrate the potential benefits of this are:
"John has a $3,000 capital loss for the current year: if his combined marginal tax rate is 30%, he would receive a current income tax benefit of $900. If he is able to harvest a similar loss every year and that tax savings was reinvested back into the market, using a 4% return (the current yield for a Treasury bill), he would have approximately $28,000 after 20 years."
While this strategy does have its advantages, one needs to be aware of the wash sale rule.
Avoid triggering a wash sale
The wash sale rule prohibits an investor from selling an investment for a loss and replacing it with the same or a “substantially identical” investment 30 days before or after the sale. If this type of sale does occur, the IRS does not allow you to write off the investment loss.
For more information, please visit https://www.irs.gov/publications/p550
Something additional to consider...
Tax-loss harvesting is one way to take advantage of losses incurred during down markets. Another thing to consider is gifting. If you are considering gifting stock to heirs and want to be below the tax exemption amount annually, using the depressed price may allow you to give more shares while staying below the exemption amount ($16,000 per Donee). Should the shares rebound, your heir will benefit from receiving more shares and a larger gift.
As always, all investment decisions should be made within the context of your long-term investment objectives and personal goals. Speak to your financial advisor and tax professional to see whether this strategy is appropriate for you.
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The information contained herein reflects the opinion and projections of Bergamot Asset Management LP (“Bergamot”) as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Bergamot does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as legal, tax, investment advice or a recommendation to purchase or sell any specific security. This shall not constitute an offer to sell or the solicitation of an offer to buy any interest in any fund managed by Bergamot or any of its affiliates. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. Market conditions can vary widely over time and can result in a loss of portfolio value. Past performance does not guarantee future results.
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The information contained herein reflects the opinion and projections of Bergamot as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Bergamot does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as legal, tax, investment advice or a recommendation to purchase or sell any specific security. This shall not constitute an offer to sell or the solicitation of an offer to buy any interest in any fund managed by Bergamot or any of its affiliates. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. Market conditions can vary widely over time and can result in a loss of portfolio value. Past performance does not guarantee future results.