Tax-Loss Harvesting: A Primer
Wednesday, November 25, 2020
Wednesday, November 25, 2020
A more in depth exploration of key sustainability topics
Tax-Loss Harvesting: A Primer
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Let’s be honest: most headlines in recent months haven’t exactly been uplifting. The COVID-19 pandemic has exacted a tragic human toll, and the measures introduced to contain its spread have of course slowed economic activity.  

Investors initially responded to dire coronavirus-related projections with a massive sell-off in February and March, and volatility has been the name of the game ever since. However, it’s not all doom and gloom—advisors can cushion the blow with tax-loss harvesting, a strategy that may help to offset losses in their clients’ portfolios. This also comes at a time when, as we approach the end of the year, many clients will likely be looking to offset their tax liabilities. Here’s our brief primer on this crucial part of the advisor’s toolbox:

What is tax-loss harvesting?

Quite simply, tax-loss harvesting is the act of selling an investment that has declined in value in order to realize capital losses that can be written off on your tax return. By realizing (harvesting) a loss, investors can offset taxes on gains and income.

Capital losses, of course, occur anytime an asset decreases in value. However, as far as the Internal Revenue Service (IRS) is concerned, those losses cannot be fully realized and offset until you have sold the corresponding investments for a price lower than you originally paid.

What are some of the limitations?

Investors and their advisers should be aware of the wash-sale rule, an IRS regulation implemented to prevent investors from selling their securities at a loss simply to enjoy tax benefits. This rule means that investors aren’t eligible to claim a loss on the sale of a security if they repurchase it (or one that's “substantially identical”) within 30 days. These rules apply to transactions occurring in their spouse’s accounts, too!

If your client’s losses exceed their gains in a given year, they can deduct up to $3,000 a year to offset ordinary income (if married and filing jointly). If filing as an individual, they can deduct up to $1,500.

When should I think about tax-loss harvesting?

While it certainly makes sense to consider tax-loss harvesting immediately prior to the end of the year, at a time when the prospect of filing returns becomes imminent, you might actually want to consider evaluating opportunities throughout the year. As we’ve seen this year, investments can be volatile, and tax-loss harvesting opportunities that presented themselves early in the year might have faded just a few months later.

We hope this provided a helpful introduction to the concept of tax-loss harvesting, and how it can help to ease the pain during periods of downturn or market uncertainty. In future blogs, we’ll be delving deeper into how this practice is particularly helpful in the context of sustainable investing.

Sources and footnotes

Ethic Inc. is a Registered Investment Adviserlocated in New York, NY. Registration of an investment adviser does not implyany level of skill or training. Information pertaining to Ethic Inc’s registrationor to obtain a copy of Ethic Inc.’s current written disclosure statementdiscussing Ethic Inc.’s business operations, services and fees is available onthe SEC’s Investment Adviser Public Information website–www.adviserinfo.sec.gov or from Ethic Inc. upon written request atsupport@ethicinvesting.com. Information provided herein is for informationalpurposes only and does not intend to make an offer or solicitation for the saleor purchase of any specific securities, investments, or investment strategies.Any subsequent, direct communication by Ethic Inc. with a prospective clientshall be conducted by a representative of Ethic Inc. that is either registeredor qualifies for an exemption or exclusion from registration in the state wherea prospective client resides. Information contained herein may be carefullycompiled from third-party sources that Ethic Inc. believes to be reliable, butEthic Inc. cannot guarantee the accuracy of any third-party information.

Ethic Inc. does not render any legal, accounting,or tax advice. Ethic Inc. recommends all investors seek out the services ofcompetent professionals in any of the aforementioned areas.  Ethic Inc. cannot provide any assurances thatany investment strategies, simulations, etc. will perform as described in ourmaterials. ALL INVESTMENTS INVOLVE RISK, ARE NOT GUARANTEED, AND MAY LOSEVALUE. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAXPROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY.

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Contributors

Alex Laipple is originally from Pittsburgh, PA, now living in New Jersey with wife Meghan and daughters Charlotte and Ruthie. Alex has 9+ years’ experience in Business Development and Investor Relations roles within asset managers and Start-ups.