Tax and Risk Management: A Look at Tax-Loss Harvesting

“To tax and to please, no more than to love and to be wise, is not given to men.” Edmund Burke, 1774

At Madison, we strive to take a methodical and emotion-free approach to investment management. This includes considering investment performance on an after-tax basis. As the saying goes, ‘it’s not what you earn, it’s what you get to keep’. And tax loss harvesting is a strategy we employ with this aim in mind.

What is Tax-Loss Harvesting?

In an ideal world, all portfolio assets would go up all the time. Unfortunately, this is rarely the case. Madison creates diversified portfolios expecting different assets to perform differently at different1040 Tax form times, some assets increase in value while others may decline. Prices of promising positions can decrease given “short- termism” from investors selling assets in the market due to emotional biases or a need for ready cash. While no one likes to see assets decline in value, short-term mispricing provides opportunities to harvest losses in taxable accounts year round. We normally think about selling positions at a gain, which is the desired outcome; however, realizing losses can be just as important. A $15,000 realized loss can be used to offset a $15,000 realized gain in a given tax year providing significant tax savings. Should losses exceed gains, they can be used to offset ordinary income of up to $1,500 for an individual or $3,000 for a couple filing jointly or carried forward to offset future capital gains and/or ordinary income. These losses can prove extremely valuable for clients.

Wash Sale Rules

The Internal Revenue Service (IRS) places a few restrictions on tax-loss harvesting including the Wash Sale Rule. The rule states that an investor or manager cannot purchase or repurchase an identical security within 30 days of the loss sale. However, they can buy a similar security to maintain the portfolio’s overall risk positioning or to take advantage of an upward movement in the market.

There are unique circumstances to each client situation. If you have questions about tax loss harvesting strategies, please consult with your tax advisor and the Madison team. We’re always interested in helping you keep more of what you’ve earned.

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. © Madison Wealth Management 2019