Tax Loss Harvesting

all has descended upon us. The trees have performed their seasonal magic trick, transforming leaves into a multitude of magnificent colors. Farmers have harvested their bounty of fruits and vegetables. Now what?? Tax loss harvesting; cull your unrealized losses that may dwell within your taxable accounts.

Remain calm. I’ll explain. Our friends at the IRS, allow investors to utilize their losses within taxable accounts to offset realized gains. Additionally, you can use any excess realized losses to offset up to $3,000 of ordinary income AND carry forward unused losses indefinitely into the future. Surprise, losses do have value.

Be realistic. The losses are there. Why not receive economic value from them? Logistically, there are several ways to implement this idea. They are as follows:

• Sell the security, harvest the loss and move on.
• Sell the security and buy back after 31 days; IRS "wash sale rule".
• Double up on the security and sell the original lot after 31 days.
• Sell the security, buy a surrogate, such as an index fund; then after 31 days sell the surrogate and buy back the original security.

Let’s discuss the IRS “wash sale rule.” In order to use the loss on your taxes, one must be out of the particular security for 31 days, if sold. Otherwise, the loss is negated for tax purposes. For example, if you sell the security, then you must wait 31 days before purchasing it back. However, you may invest in a different security or surrogate. This approach will allow you to maintain market and security exposure.

Ok, I know what you are thinking. What is the right plan for me? Well, it depends on your view of the market and of the security. All of the above accomplish the goal of offsetting realized gains, but vary in their outlook for the market. If you want to maintain market exposure, buy a surrogate or double up. These approaches avoid going “naked” and missing out on a market advance or increase in the security.

Now that you are an expert in tax loss harvesting, review your portfolio and take the appropriate action. If you employ an investment advisor, then consult with him to accomplish this goal by yearend. Unfortunately, a lot of investment advisors and financial planners do not make loss harvesting a part of their services. However, it should be! You will reduce your taxes and maybe even sleep sounder! And if you are really sharp, invest the savings!

Russ Floyd, CFA
Senior Vice President
High Country Capital Management