Hey everyone, happy Tuesday! Since it’s officially tax-loss harvesting season, we’ve published a guide for you. We’ll dive into what it is, why it’s a big deal, and how Reconcile can (potentially) save thousands of dollars this tax season!
Tax-loss harvesting 101
Tax-loss harvesting is an investment strategy that can help you lower the taxes you may owe on your capital gains or regular income. It involves you selling an investment at a loss to offset any realized gain. So while your portfolio value remains the same, your tax liability is lowered. One thing to keep in mind, you only have until December 31 to harvest your losses. Otherwise, you may get stuck with a large tax bill for 2021!
Tax-loss harvesting is a proven strategy to pay less tax and potentially boost your returns.
Most retail investors fall into the trap of selling gains and holding onto losses. The reverse strategy may prove to be better to optimize your taxes and returns. It’s never a good feeling to sell at a loss and admit you made the wrong call. However, in the example below, you can see how selling your losses offsets your gains; thereby lowering your tax bill.
A recent study, from researchers at MIT and Chapman University, showed that tax-loss harvesting adds approximately 1% of alpha to your returns every year if done effectively. When you sell at a loss, you have two benefits, a lowered tax liability and cash, which can be reinvested immediately. Portfolios that tax-loss harvest properly tend to capture all losses and use the proceeds to double down on winning stocks. The cash you save from paying less tax can also be invested and compounded over time.
Reconcile automates the hard work of figuring out when and what to harvest.
The trouble with tax-loss harvesting is figuring out if you have any positions that should be sold, what the tax impact will be if you do sell, and what to do next.
With Reconcile, you can now see a real-time snapshot of all the positions that you can use to tax-loss harvest and the estimated tax impact if you were to sell. Soon, you'll see a recommended list of securities to buy within the same industry or that are industry-specific exchange-traded funds (ETF) or mutual funds, which fit into your investment strategy.
🚨 Bonus: here are a couple of key things to know when tax-loss harvesting yourself
To find out which tax lots should be harvested, you’ll need to know the date and value you purchased each share at. So you can calculate if it's currently an unrealized loss. Unfortunately, brokerages don’t make this easy to find. But you can always use Reconcile to calculate this automatically for you!
To avoid a wash sale after selling your investment at a loss, rebuy a similar security instead. For example, if you sold Tesla (TSLA) at a loss, you can buy an ARK ETF (ARKK) to avoid a wash sale but continue investing in Tesla.
Even if you don’t expect any capital gains this year, you should still tax-loss harvest since your losses can be used to offset up to $3,000 in ordinary income (e.g. your wages). Also, your losses can be carried into the future so they’ll eventually offset your investment gains or income.
Retirement accounts such as IRAs and 401(k) accounts grow tax-deferred so there’s no value to tax-loss harvesting within them.
You can tax-loss harvest across your investments. So, for example, you can offset losses from your NFTs, against your gains from stocks. Keep in mind that all the gains and losses (if applicable) in each character category are netted first within each category. So in layman’s terms, you have to first net your gains and losses within NFTs before they can be deducted from your net stock gain.
You don’t always need to sell positions that are currently at a loss. But if you have a large tax liability, you should think about selling to avoid a big tax bill!
Prioritize selling your short-term losses (positions you’ve had for less than a year) since your short-term gains are taxed at higher rates.
As of November 9, you have exactly 52 more days to tax-loss harvest in 2021!
Hope you found this guide helpful! If you want to sign up for Reconcile - head on over to our website: getreconcile.com, and we’ll have our CEO personally onboard you once you’re off the waitlist!
Have a great rest of your day!
Disclaimer: The above content is provided for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals.