What is tax-loss harvesting? | Aperio

Tax

Nov 9, 2023

Lincoln Fleming, CPA/PFS, CFP, MAcc

The bottom line

Goal of tax-loss harvesting is not to invest in securities that will decline in value but rather to improve after-tax returns by taking advantage of market volatility.
Tax-loss harvesting must be accomplished in taxable accounts, and investors must have sufficient capital gains or other income available to absorb the realized losses.
Factors that affect the quantity of losses that can be harvested include the source of funding, the size and frequency of cash infusions and withdrawals, and the timing and frequency of loss harvesting.

Tax-loss harvesting as an investment strategy has seen a rise in popularity, and in the right circumstances, it can significantly improve after-tax returns on an investment portfolio. However, knowing why and when to implement this nuanced strategy in your clients’ portfolios is key. Senior Aperio Tax Economist Lincoln Fleming, CPA/PFS, CFP, MAcc, has recently published an article in the September issue of The Tax Advisor, entitled, “The economics of tax-loss harvesting” which guides those seeking to understand the context and mechanics of tax-loss harvesting, but also helps advisors determine when the strategy may be suitable for their clients.

While every investor has unique circumstances, to benefit from tax-loss harvesting, investors must have adequate taxable capital gains or other income available to absorb the realized losses. Investors with gains available to offset can begin to explore the potential benefits of tax-loss harvesting which are threefold; reduction of the investor’s current tax liability, tax rate arbitrage if there is a favorable tax differential between the benefit of the harvested losses and the cost of future gains, and tax deferral on the initial tax savings.

In Lincoln’s article, he explores not only the benefits of tax-loss harvesting, but takes time to consider factors that may affect the quantity of harvested losses. Additionally, he explores how these factors might impact the cost basis of the investment portfolio return.

Interested in learning more? Read the complete article at this link.

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Lincoln Fleming, CPA/PFS, CFP, MAcc

Director, Senior Tax Economist

Lincoln is a Director and Senior Tax Economist at BlackRock, where he helps clients focus on the intersection of taxes, investing, and estate planning and the importance of after-tax returns for taxable investors. He also helps to research and deliver innovative tax strategies and solutions for clients.