Who can benefit from tax-loss harvesting?

Tax-loss harvesting is most beneficial for people with regular investment accounts. It works well for those who have both winning and losing investments, allowing them to offset gains and reduce taxes.

Can tax-loss harvesting be used with retirement accounts?

No, tax-loss harvesting only applies to non-retirement accounts like brokerage accounts. Retirement accounts like IRAs and 401(k)s are not eligible for this strategy since they grow tax-deferred.

What are the key rules for tax-loss harvesting?

Two main rules to follow: First, avoid "wash sales," where you sell and repurchase the same or similar investment within 30 days. Second, match short-term losses with short-term gains and long-term losses with long-term gains for maximum tax benefits.

Tax-Loss Harvesting: A Simple End of Year Strategy to Save on Taxes

Q: What is tax-loss harvesting?

Tax-loss harvesting is a strategy where you sell investments that have lost value to reduce the taxes you owe on gains from other investments. It helps lower your taxable income and can save you money at tax time.

How Tax-Loss Harvesting Can Help Lower Your Taxes and Boost Your Investments

If you’ve ever had to sell something for less money than you bought it for, it probably didn’t feel great. But when it comes to investing, selling something at a loss can actually save you money when it’s time to pay taxes. This is called tax-loss harvesting, and it’s a smart way to use losses to balance out your gains and keep more money in your pocket.

*** REMEMBER, this only applies to non-retirement accounts! ***

Let’s break it down!

What Is Tax-Loss Harvesting?

When you sell an investment, like a stock or a bond, you either make money (called a capital gain) or lose money (called a capital loss). Tax-loss harvesting is when you sell investments that have lost money to cancel out the taxes you owe on investments that made money.

Here’s how it works:

Sell a Losing Investment: Pick something in your portfolio that’s worth less now than when you bought it.
Use the Loss to Cancel Out Gains: Use that loss to reduce the amount of money the government can tax from your gains.
Extra Losses Can Offset Other Income: If your losses are bigger than your gains, you can reduce other income, like wages, by up to $3,000.
Carry Forward Losses: If you have even more losses, you can use them to lower your taxes in future years.

Who Benefits Most from Tax-Loss Harvesting?

Tax-loss harvesting is a smart way for people with regular investment accounts (not retirement accounts) to save money on their taxes. It works best if you have some investments that made money (winners) and some that lost money (losers). You can use the losses from the bad investments to cancel out taxes on the good ones. Even people who don’t have gains to cancel out can use up to $3,000 of their losses to lower other taxable income, and any extra losses can be saved to use in future years.

This strategy only works with regular accounts, like brokerage accounts, because retirement accounts like IRAs and 401(k)s already grow without being taxed until later. If you have different kinds of investments, tax-loss harvesting is a great way to save money, fix up your portfolio, and be ready for tax season.

Why Would You Do This?

The main reason is to pay less in taxes! When you pay less to the government, you keep more money to save, spend, or reinvest. Tax-loss harvesting can also help you reset your portfolio by getting rid of investments that aren’t working for you and buying ones that better fit your goals.

What Are the Rules?

No Wash Sales: some text
- The wash sale rule is a rule that stops people from getting a tax break by selling an investment and then quickly buying it back again. For example, if you sell a stock to claim a loss on your taxes, you can’t buy the same stock or something very similar, like a fund that closely matches it, within 30 days before or after you sell it.
- To follow this rule, you need to wait at least 31 days before buying the same or a very similar investment. Or you can buy something different but related, like selling one tech company’s stock and buying stock in a different tech company. This rule is in place to make sure people aren’t just pretending to lose money to pay less in taxes while still keeping the same investment.
Match Gains and Losses: It’s best to use short-term losses to cancel out short-term gains (taxed higher) and long-term losses for long-term gains (taxed lower).

Two Simple Examples

Example 1: Offsetting Income From Interest

Imagine Sarah owns an ETF that tracks the S&P 500, but it’s lost $3,000 in value this year. At the same time, she has another investment that made $3,000 in profits. She decides to sell the losing ETF to harvest the $3,000 loss and reinvests in a similar ETF that tracks the Total Stock Market Index.

What Happens? Sarah uses the $3,000 loss from the first ETF to cancel out the $3,000 in gains, which means she doesn’t have to pay taxes on those profits.
Bonus: By buying a similar ETF that tracks a different index, Sarah stays invested in the market without triggering the wash sale rule.

Why It’s Smart: Sarah avoids paying taxes on her $3,000 gain and keeps her portfolio aligned with her goals, saving her money and staying compliant with tax rules.

Example 2: Helping a Retiree

John is retired and gets money from Social Security and investments. This year, he made $10,000 in profits from selling a stock but wants to lower his taxes so his Social Security money isn’t taxed.

What Happens? John sells a stock that lost $12,000. The $12,000 cancels out the $10,000 profit, and the extra $2,000 lowers his other taxable income.
Result: His taxes are lower, and his Social Security income stays tax-free.

Why It’s Smart: John keeps more of his money and pays less to the government.

Why It Matters for You

Even though you might not be investing yet, understanding tax-loss harvesting is a valuable skill for the future. When you start investing, knowing how to save on taxes can help you grow your money faster.

If this sounds confusing, don’t worry—adults usually ask financial advisors or tax experts for help. The important thing is to remember that sometimes losing money can actually be a win when it comes to taxes!

Make It Simple By Working With An Advisor

Navigating tax-loss harvesting can feel overwhelming, especially with rules like wash sales and the need to match gains and losses correctly. This is where a financial advisor can make a big difference. They can analyze your portfolio, identify opportunities for tax savings, and ensure you’re following all the rules to avoid costly mistakes.

Advisors can also help you reinvest strategically to keep your financial goals on track while minimizing taxes. By working with a professional, you can simplify what might seem like a complicated process and make the most of your investment strategy.

Wrapping It Up

Tax-loss harvesting is a powerful tool that can help you reduce your tax bill, improve your portfolio, and keep more of your hard-earned money. By understanding how it works, following the rules, and knowing when to apply it, you can turn investment losses into an opportunity for financial growth.

Whether you’re managing a diverse portfolio or just starting to invest, this strategy is worth exploring. And remember, if it ever feels too complicated, a financial advisor can help guide you through the process and ensure you’re making the smartest decisions for your future. Tax season doesn’t have to be stressful—with the right strategies, it can be an opportunity to get ahead.

Intermountain Wealth Management is a Registered Investment Adviser (RIA). The company manages several fee-based portfolios comprised of various equity and fixed-income investments that may include mutual funds and exchange traded funds. This is not a prospectus or an offer to sell any security. Please read the prospectus of any investment before you invest. Information included here is intended for education and information purposes only. The S&P 500 Index represented cannot be directly purchased.

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