What is Tax Loss Harvesting?

Not all investments make money and sometimes things don’t go quite like they were planned. This is the nature of Investment Risk.

In these cases to may become necessary to “clean out the attic” and get rid of some less than successful investment choices and trade them for some more promising choices.

Fortunately the IRS Tax Code (IRC) allows you to write off investment losses against investment gains in the year they are realized and even carry forward some of those losses to future years to reduce your Capital Gains Tax liability. In addition some of the investment losses can also be written off against your Income Tax liability.

However there are some somewhat complicated rules which may require some rather diligent recordkeeping.

Short-Term Gains and Losses and Long Term Gains and Losses

Short-Term Gains and Losses are for investments that are held for less than one year. They are taxed at your current Income Tax rate. Long Term Gain and Losses on investments held for more than a year are taxed at special Capital Gains rates. This is a matching game. Short-Term losses are deducted against Short-Term gains and Long-Term losses are deducted against Long-Term gains. Fortunately most of this information is sorted out and contained in the 1099 tax statement received each year from your Broker. Missing information should be contained in your own records, hence the need for diligent record-keeping. A good Financial Advisor should keep this on file for you.

Account Registrations?

Qualified Accounts – Qualified Accounts, such as an IRA or 401k, are accounts that are tax protected by the IRS. Typically income tax will be paid only when funds, including any investment gains, are distributed from the account. This means that Tax Loss harvesting doesn’t have much usefulness in these accounts since there is no Capital Gains Tax applied to these accounts.

Non-Qualified Accounts – These are accounts that are not tax-protected by the IRS. They are subject to Capital Gains taxes, Income Taxes, and Dividend Taxes. This is where most of our attention needs to be.

What’s the Catch?

Wash Sale Rules – So can you just sell an investment, book the tax loss, and then just immediately buy it back? Not quite. The IRS disallows the tax deduction if “the sale of stock or securities at a loss is within 30 days before or after you buy or acquire in a fully taxable trade, or acquire a contract or option to buy, substantially identical stock or securities.” (See IRS Pub. 550 for more details). So, watch the dates of the trades so you don’t get caught in this trap.

Tax Lot Selling

Professional Investment Managers should have sophisticated software that allows them to pick and choose which investment purchase (“lot”) to sell to realize the investment loss. This comes in handy when there are multiple purchases of an investment that occurred over a period of time at different prices. This may allow you to maximize the tax loss on the sale of your investment shares.

Tax Loss Carry Forwards

If you have a capital loss that is greater than what you can use for current year tax deductions the IRS allows you to carry it forward into future tax years.

An Extra Added Bonus

The IRS also allows you to use a capital loss deduction of up to $3000 of taxable income. This is a good way to potentially reduce your Income Tax liability in addition to your Capital Gains tax liability. This can also be carried forward to future year and applied again, up to the limit, until it is used up.


You can study more about tax management of your investments in our presentation on Tax Avoidance Strategies on our website www.SWRetire.com as well as learn more about our full service Financial Advisory practice. You should also consult your Tax Professional (CPA) to review your tax situation to ensure the most desirable outcome.

Views, opinions and analyses expressed in this presentation are those of Southwestern Retirement and not those of Independent Financial Group, LLC.

Registered Representative offering Securities and Advisory Services through Independent Financial Group LLC,

a Registered Broker-Dealer and Investment Adviser. Member FINRA/SIPC.

 Southwestern Retirement Planning Advisors, Inc. is not affiliated with Independent Financial Group LLC.

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