• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Wealth Pilgrim

No Money Worries. No Matter What.

Neal Frankle featured in
  • Home
  • Life Insurance
  • Investing
    • Build Strong Investment Building Blocks To Avoid Going Broke In Retirement
    • Systematic Mutual Fund and ETF Investing
    • Stock Market Investing Guide
    • Choosing the Right Investment Brokerage Guide
    • How Bonds Work Guide
    • How Banks Really Work Guide
    • Annuities – What You Need To Know Before You Invest
    • A Beginners Guide To Buying Individual Stocks
    • Create A Pool Of Great Mutual Funds and ETFs To Pick From To Secure Your Retirement
    • ETF and Index Fund Investment Guide
  • Earn More
  • Banking
  • Retirement Planning
    • Retirement Guide
  • Ask Neal a Question
  • Reviews
    • Upgrade Personal Loans Review
    • Lending Club Review
    • Prosper Review
    • Ally Invest TradeKing Review
    • CIT Bank Review
    • LegalZoom Review
    • Lexington Law Review
    • Airbnb Host Review
    • Should You Drive For Uber?
  • Tax
  • Courses
    • Raise Your Credit Score So You Can Buy a House – Free Video Course

How Tax Loss Harvesting Can Save You A Fortune

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

Most people I know really don’t like to lose money with their investing. That just makes sense. But what if I told you there was a way to cash in on those losses? Would that change your mind about that red ink? What if I went one step further and said that it might be in your interests to sell a fund for less than you paid for it? Would you think that I’d lost my mind and that such thing is impossible?

Well, if you thought that way you might miss out on some very sweet tax giveaways Uncle Sam is just dying to send your way. What I’m referring to is “tax loss harvesting” and how it can put lots of dollars in your pockets around tax time.

What Is Tax Loss Harvesting?

Tax loss harvesting is the process that sharp investors engage in towards the end of the year. They look for funds (or stocks) that currently trade below the price they paid for them. Then, they sell the position and lock in the realized loss. At that point, they have three choices;

1. Do nothing.
2. Buy the stock or fund back in 31 days to avoid the wash sale rule. This allows them to nail down the tax loss yet still own the position. Of course the risk is there. If the stock moves up dramatically during that 31 days, the investor that sat on the side lines is out of luck.
3. Buy a similar stock or fund the day they sell the original fund to lock in the tax loss. This gives them the tax loss and it eliminates the market risk of being out of the market. The only downside here is that the original stock could go up more than the replacement position.

What Is The Benefit Of Harvesting Tax Losses?

You can use the investment losses that you harvest to offset gains you realized with other transactions. For example, let’s say you invested $10,000 in XYZ and sold it for $12,000. That’s nice – but it leaves you with a $2,000 taxable gain. If you scout your holdings and sell something else that generates a $2,000 loss, you won’t have any taxes to pay on the gain. Remember, if you sell the loser, you can buy something else just like it so you won’t be out of the market. Life is sweet. Stop and smell the dollars.

And if you still have losses on your books after you’ve wiped out the realized gains from other investment activity, you can use $3,000 of the write off to offset taxable income. Pinch me.

Why Is Now A Great Time To Harvest Investment Losses?

The market has been really volatile this year. And that roller coaster ride may not be over. If you are sitting on a big loss in a position, consider selling it, locking in the loss, and using one of the three strategies I outlined above.

Just don’t wait around for the market to implode before looking into this. Identify tax loss candidates now (and their replacements). This way, if the market takes a big dive, you can implement this strategy, snag a nice tax benefit and buy new shares of a different but similar position (if you select option 3) at a discount.

Investing involves risks. And investors do lose money sooner or later. But just because you lose money on a transaction doesn’t mean you have to take all the loss on your shoulders alone. If you play your cards right and use tax loss harvesting, you can make the IRS your partner by sharing some of those losses with them.

Are you harvesting losses to reduce your tax liability for next year?  What other end-of-year tax strategies are you going to use?

Tweet
Pin
Share1

Reader Interactions

User Generated Content (UGC) Disclosure: Please note that the opinions of the commenters are not necessarily the opinions of this site.

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Are You Human? * Time limit is exhausted. Please reload CAPTCHA.

Primary Sidebar

Who is Neal Frankle

Neal Frankle

I'm a Certified Financial Planner™ with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
Read More »

Stay Connected

Facebook Twitter YouTube RSS

More Categories

Career Development
College Funding
Credit Cards
Credit Score Fixes
Money and Marriage
Debt Relief
Estate Protection
Property Investment Loans
Small Business Strategies
Spend Less Money

Disclaimer

Wealth Pilgrim is not responsible for and does not endorse any advertising, products or resource available from advertisements on this website. Wealth Pilgrim receives compensation from Google for advertising space on this website, but does not control the advertising selection or content. Please do the appropriate research before participating in any third party offers. The information contained in WealthPilgrim.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation. Wealth Pilgrim does not provide investment advisory services and is not a registered investment adviser. Neal may provide advisory services through Wealth Resources Group, a registered investment adviser. Wealth Pilgrim and Wealth Resources Group are affiliated companies. In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving payments,access to free products and services for product and service reviews and giveaways. Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.


About · Contact · Disclaimer & Privacy policy

Copyright © Wealth Pilgrim 2021 All Rights Reserved