As stocks have been up and down recently, the concept of Tax Loss Harvesting has once again become popular. Physician on Fire has an excellent post on how to do it.
But why would one bother? Here are 5 reasons:
1) It saves you money on taxes against income.
Years ago I heard about wealthy people having a “treasure trove of losses” and didn’t really understand. What it means is that if you have a taxable account and lots of losses, you can sell with the knowledge that your losses can neutralize future gains—and tax headaches.
That’s right—when you sell at a loss in a taxable account, you get to claim it on your taxes. You can deduct up to $3000 each year.
If you lose more than $3000 this year, you can still use the loss in the future. You deduct $3000 against your income each year until your loss is “used up.”
2) You get to do something, rather than nothing. When the market is tanking, it is normal to have the urge to sell and buy something else (usually something “safe”). This is human.
If you already have a plan of what to do if something goes down, then you sell and buy a similar—but not identical—taxable stock.
This gives you the double bonus that you’re doing something, but also something that’s helpful to your bottom line—instead of selling out at the bottom.
3) Overall costs for some funds have come down over the years while other funds have stayed the same. Those with taxable accounts may feel trapped in these funds by capital gains in now not-so-cheap funds. Look around at your options. You may find your tax loss option is better than your original investment (less expensive, more exposure…)
4) Those big red numbers look awful. Get rid of them! 🙂
And 1 Reason not to Tax Loss Harvest:
Your spouse may think you are “timing the market.” Well, you may or may not be doing that, but tax loss harvesting by itself is not timing the market. Proceed to show your partner this study on the practice so you can win them to your way of thinking.
(Editor’s note: I may, or may not have had to be shown studies on tax loss harvesting when DH first ventured into this years ago ;-). Since next week is Thanksgiving, we’ll be spending time with our family. See you the week after next and have a wonderful, safe holiday!)