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Weekend Reading: Why Tax-Loss Harvesting During Down Markets isn’t Always a Good Idea

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|Tax |Stock Market |"Kitces" Articles
This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
Weekend reading tax loss harvesting pros and cons Weekend reading tax loss harvesting pros and cons

Weekend Reading

Amidst recent tumultuous market activity, one strategy you might consider deploying to negate losses is tax-loss harvesting; However, there are instances when this might only bring you a neutral outcome, or even cause you further loss.

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A potential tax pitfall: From a high level, tax-loss harvesting allows you to convert “capital losses into a tax deduction while staying invested.” The end goal is to benefit when markets recover, but that will depend on your tax rate when you deduct the initial loss, in addition to the rate at which you “realize the later gain that the initial loss created.” For those who will be taxed on future gains at a lower rate than losses harvested today, a “net tax benefit” is certainly worth the effort. On the other hand, if your future gain is taxed at a higher rate, the capital gains that ensue could push you into an ever higher future tax bracket.

Putting your savings to work: You should also only focus on harvesting losses if you intend to reinvest those initial tax savings for further growth. Spending this money at the onset would require having to withdraw additional savings in the future to pay for extra capital gains prompted by harvesting the loss. And, if you’re carrying over major losses from years prior that may not be utilized during your lifetime, this could result in more carryover losses upon your passing, while the cost basis is stepped down.

Proceed with caution: Tax loss harvesting is an opportunity for your advisor to add value to your bottom line; however, the net benefit needs to be carefully analyzed and the impact can vary greatly from one person to the next.
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