Tax-Loss Harvesting

Tax-Loss Harvesting“The most important thing to do if you find yourself in a hole is to stop digging.” – Warren Buffett

The Oracle of Omaha, Warren Buffett, is one of the most revered investors in the world. His oversight, with the addition of Charlie Munger’s advice, has led Berkshire Hathaway to be a company worth almost one trillion dollars in net value.

While his quote from above suggests that he believes in calling it quits when you know you have a loser investment, he also regularly cautions any investor to invest for the long term and be vigilant through the down times.

So what is the right approach for someone who has an investment that is currently underperforming?

Well, if it is December, tax-loss harvesting may be the best way for you to accommodate both approaches while staying ahead of the government’s taxation requirements and winning in April through actions made in December.

What is Tax-Loss Harvesting?

Tax-loss harvesting essentially means selling off a bad investment to offset the tax liability of positive investments you have made during the current tax year. The spoils of good investment benefit you, the investor, but the government also sees the capital gains as an opportunity to add to their coffers.

So when you have a win in investing, you need to look for ways to keep those gains to yourself for further investment or strategic use. Taking a stock that is currently operating at a loss, and selling it to offset your gains from other stocks, is the basic reason behind tax-loss harvesting. Besides reducing your taxes, tax loss harvesting also frees up cash so you can buy new assets that may be more likely to generate positive performance. Just make sure you don’t invest in something that only you love.

Some basic rules around tax-loss harvesting stipulate the timeline within which you can redeploy the money from the losing stock sale, or prohibit you from re-buying the same sold stock. You also have to be careful about buying almost identical stocks as those which you have sold.

Who Benefits?

Anyone who invests and sees losses, as well as gains, can benefit from tax-loss harvesting. While those in higher tax brackets stand to benefit more from this practice, everyone should take advantage of this legal opportunity to reduce the amount of taxes they may owe the government, assuming their situation meets the appropriate requirements.

This unique act shouldn’t be used simply as a means to save taxes owed, however. There is no point in selling off a stock that is expected to rebound or outgrow your initial investment, just to offset gains from another stock. A prudent investment strategy should be adhered to, and harvesting should only be set in motion when the benefits outweigh any potential negatives of your strategy.

When Should You Act?

To take full advantage of the tax-loss harvesting opportunity, you need to make sure that any sales of investments that have resulted in a loss are complete before the end of the current tax season. This is the only way to offset gains made in the current tax season, with your losses.

Additionally, you will need to know when the stocks of both your gains and losses were purchased. This is so you can confirm that your capital gains are accurately calculated, and then offset your gains accordingly with your losses. It should be noted that a business owner, who takes advantage of tax-loss harvesting, can potentially use a minimal amount of those losses toward their personal tax liabilities, once all potential uses for the business liability have been exhausted.

Again, you should make sure that your approach doesn’t run afoul of your current investment strategy, but down markets can provide the best times to take advantage of tax-loss harvesting. You can maximize the capital you have to reinvest in other stocks or assets by purchasing the ones with the most upside, while at bargain prices.

We prefer to help you buy or sell businesses at Apex, instead of stocks. But we know great people who can help guide you in harvesting your tax losses.  If you need a referral, give us a call and we’ll connect you.