Tax-Loss Harvesting and Your Portfolio: The Upside of Market Volatility


I doubt if anyone makes an investment, hoping that it will drop in value. After all, the idea is that we invest our money so that, someday, we can live on the proceeds, rather than working for our livelihood.

But sometimes, an investment that didn’t work out — or that hasn’t worked yet — can be utilized to your advantage. Especially when your income places you in a higher tax bracket, it can make sense to recognize a loss in one part of your portfolio to minimize the taxation of gains in another area. This practice is called “tax-loss harvesting,” and recognizing opportunities in this area is an important service that an alert and engaged financial advisor can provide in order to maximize the overall performance of your portfolio and minimize the impact of taxes on your asset base.

What Is Tax-Loss Harvesting?

First, it’s important to remember that in tax-loss harvesting, we are considering two main types of taxes: 1) long-term capital gains tax; and 2) short-term capital gains tax. Long-term capital gains are taxed at one of three rates, depending on your other income: 0%, 15%, or 20%. Especially for higher-income individuals, even the maximum capital-gains tax rate is typically less than the tax rate for ordinary income. Long-term capital gains taxes apply to gains on assets held for a year or more. Gains on assets held for less than a year are subject to the short-term capital gains tax rates, which are the same as the taxpayer’s ordinary income tax rate.

How Does Tax-Loss Harvesting Work?

Suppose you have sold Mutual Fund A, which you owned for over a year, and you realized a capital gain on the sale of $150,000. If you do nothing, you will pay tax on that gain at whatever long-term capital gains tax rate applies to your income bracket (likely either 15% or 20%). However, if you have Mutual Fund B, also held for over a year, which has an unrealized capital loss of $75,000, you might wish to “harvest” that loss and use it to offset the gain in Fund A, cutting in half the amount of your taxable long-term capital gain. That, in its simplest form, is how tax-loss harvesting works.

Often, investors who employ tax-loss harvesting will want to replace the asset that they sold at a loss, in order to maintain their desired asset allocation. But you must wait at least 30 days after a sale before replacing the asset with another that is “substantially identical,” in IRS terminology, in order for the loss to be recognized.

Short-term capital losses may also be used to offset gains, but they must first be allocated against short-term gains, if any. Net short-term losses may then be applied to offset long-term gains. The vice-versa is also true: long-term losses can be used to offset short-term gains, but only after they have been applied to any long-term gains.

Tax-loss harvesting is typically something my clients focus on toward the end of the year, when the picture of gains and losses is becoming clearer. The key is that a qualified, professional financial advisor can help you analyze your portfolio, not only in light of your gains and losses for the year, but also taking into consideration your long-term strategy and needs. Especially for thriving retirees with substantial assets, making tax-efficient use of your holdings is one of the most important things you can do, and I’m here to help.

Stay Diversified, Stay YOUR Course!

Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.

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