Tax-loss harvesting
What is tax-loss harvesting?
Tax-loss harvesting is a tax strategy designed to maximize after-tax returns by selling investments at a loss to offset capital gains elsewhere in the portfolio. When realized losses offset realized gains, this means less taxes paid and more money to invest and potentially grow.
Investors want to build wealth over time, but if you aren’t careful, taxes can eat away at that wealth.
One way to reduce your tax burden may be to use a tax-loss harvesting strategy.
With this strategy, you look to sell investments at a loss and use the proceeds to buy investments with similar exposures.
Let’s take a look at a hypothetical example to see how it works.
Generally, if you sell a taxable investment for more than you paid for it, you have a realized gain.
Similarly, when you sell an investment for less than you paid for it, you have a realized loss.
With tax-loss harvesting, you realize losses, and reinvest the proceeds into your portfolio.
When realized losses offset realized gains, this means less taxes paid and more money to invest and potentially grow.
Any losses that were not used this year can be carried forward into future years.
Some things to consider with tax-loss harvesting:
First, if you harvested losses but don’t have enough gains to fully offset, you can still lower your year-end tax bill with a reduction of up to $3,000 of ordinary income per year.
Second, the Internal Revenue Services, or IRS, has stipulations around netting gains and losses.
Finally, the IRS 30-day wash-sale rule generally prevents you from recognizing a tax loss if you repurchase the same or a substantially identical security during the 30-day wash sale window.
And as always, tax-loss harvesting may not be for everyone.
Help your clients stay invested while potentially saving money on taxes.
Use BlackRock's Tax Evaluator to help identify tax loss harvesting opportunities.
INVESTING INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
The Internal Revenue Service has not released a definitive opinion regarding the definition of “substantially identical” securities and its application to the wash sale rule and ETFs. The information and examples provided are not intended to be a complete analysis of every material fact respecting tax strategy and are presented for educational and illustrative purposes only. Tax consequences will vary by individual taxpayer and individuals must carefully evaluate their tax position before engaging in any tax strategy.
This material is provided for educational purposes only and is not intended to constitute investment advice or an investment recommendation within the meaning of federal, state or local law. You are solely responsible for evaluating and acting upon the education and information contained in this material. BlackRock will not be liable for direct or incidental loss resulting from applying any of the information obtained from these materials or from any other source mentioned. The information contained herein is based on current tax laws, which may change in the future. BlackRock does not render any legal, tax or accounting advice and the education and information contained in this material should not be construed as such. Please consult with a qualified professional for these types of advice.
Due to the complexity of tax law, not every single taxpayer will face the situations described herein exactly as calculated or stated; i.e., the examples and calculations are intended to be representative of some but not all taxpayers. Since each investor’s situation may be different in terms of income tax, estate tax, and asset allocation, there may be situations in which the recommendations would not apply. Please discuss any individual situation with tax and investment advisors first before proceeding. Taxpayers paying lower tax rates than those assumed or without taxable income would earn smaller tax benefits from tax-advantaged indexing or even none at all compared to those described.
No proprietary technology or asset allocation model is a guarantee against loss of principal. There can be no assurance that an investment strategy based on the tools will be successful.
Prepared by BlackRock Investments, LLC, member FINRA. BlackRock Fund Advisors, an affiliate of BlackRock Investments, LLC, is a registered investment adviser.
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Discover how tax-loss harvesting can unlock potential tax benefits
“Investors are waking up to the fact that taxes really do matter and to the impact they can have on a portfolio.”
- Lincoln Fleming, BlackRock Director & Senior Tax Economist
Incorporating tax economics
Tax-loss harvesting FAQs
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Tax-loss harvesting is a process that involves selling positions that have declined in value and reinvesting the proceeds from the sale in a similar security. This creates losses to offset gains elsewhere in the portfolio – thus creating a tax benefit for the client – without meaningfully changing a client's investment exposure.
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Tax-loss harvesting strategies benefit from an "always-on" approach. Clients should realize losses throughout the year rather than just at year-end or during market dips. This creates more opportunities to loss harvest and maximize the benefits to their tax bills.
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Many taxable clients may express hesitation in adopting a tax-loss harvesting strategy. Some possible reasons include:
- Appropriateness: An investor must have material gains from other investment(s) on their Schedule D (Form 1040) for loss harvesting to be valuable, especially after accounting for the fee premium vs other vehicles like ETFs.
- Mental accounting: Some investors think of investment returns and tax payments as different account buckets and may have difficulty understanding how they are intertwined.
- Behavioral reasons: Some investors don’t like to sell an investment at a loss – they may want to believe the investment will recover and ultimately become profitable.
The key to addressing pushback is education to ensure the client fully understands the benefits and drawbacks of the approach and makes a decision that is right for them.
