Tax Harvesting Time

A farmer understands the harvest. This is when crops are gathered to be sold at the end of the growing season. For many farmers it is the only time they are paid. Sadly, it is also when the IRS agent shows up to collect his share of those profits.

Investors are like farmers. They essentially plant a crop they hope to harvest in the future at a profit. When that time comes the profits can be substantial, but just like the farmer, soon the tax man shows up demanding his cut. Investors however have a tool not generally available to farmers. Investors will also likely have crops that have not done well, stocks that have gone down. They can harvest these poor stocks as well and instead of earning a profit, they can claim a loss. This loss can be used to offset the profits on the sale of their good investments. This strategy is known as “Tax Harvesting.”

I am amazed at how few investors and advisors take full advantage of laws that allow for tax harvesting. In our office, December is a very busy month. While our clients are generally out shopping or celebrating, we take advantage of the time to do some tax harvesting. Going through every one of our taxable accounts, we look for positions with significant gains and try to match them with other positions that are down. Since investments move in cycles, in any given year there is usually something that is down. By selling both positions we are able to harvest losses to offset gains, eliminating some of the taxes. A reason some investors overlook this strategy is they don’t want to sell some of those great positions they have held a long time. But this is not a problem since IRS rules allow a position that is sold for a gain to be repurchased immediately without penalty. Thus, the gain is captured, the sale of the losing position offsets the tax, and then the position can be repurchased with the taxable basis reset at current prices. It is a win-win for the investor. On the chance that the investor wants to retain the losing position as well, they will need to wait 30 days to buy it back or the IRS will disallow the loss.

If you have positions in your taxable accounts that have large gains, you should routinely look for opportunities to harvest losses and offset some of those gains. Over your investing lifetime a strategy of regular tax harvesting can have a significant effect on your family nest egg. Taxes can be the largest expense in your lifetime so continually looking for opportunities to reduce taxes should always be on an investors’ radar. What’s even better is that during down years it is often easier to find tax harvesting opportunities. Thus, even a bad year can have positives if it can save some taxes. Remember, every dollar you save in taxes is a dollar earned. Consider it a Christmas gift from the IRS.

Dan Wyson, CFP® is author of “The Gold Egg," and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 - 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network(R), member FINRA/SIPC, a registered investment advisor