Another tough week for the markets both equity and fixed income. This is where advisors are here to show their worth. This is the Super Bowl or if you’re more of a golfer, The Masters. Continuing off my “so, what now?” blog I’ll tell you what I have been doing to cover what’s next.
Tax Loss Harvesting. This is a huge benefit to investors that have taxable accounts also called brokerage accounts. This type of account can be owned with someone else or individually. Historically taxable accounts have been used to buy and sell stocks for long term investments. Part of the issue with this type of account is the taxes that come along with selling. If you own a security and sell it after 12 months you are hit with a 15% long-term capital gains tax, woof. It is even worse if you sell it within 12 months of buying, you pay short-term capital gains which is taxed at your ordinary income tax rate, bigger woof.
Now with the market dipping substantially over the past couple of weeks investors have a huge opportunity to capitalize and harvest some losses. This means, if you owned a security and it is now below your basis (what you paid for it), you can now sell this security for a loss. There are a couple of ways this can benefit you. If you own another security that has a large gain that maybe you want to own a little less of and cash in the gains, you can offset them with the losses from somewhere else. For example: if I had $10,000 of long-term gains in my brokerage account in Apple stock and had $10,000 of long-term losses in Mobile, I could offset those and owe net $0 in taxes. You have used a loss to offset a gain. Now, if you don’t have any gains you can sell off the losses and take the loss of up to $3,000 on your current year tax return. The remainder can be carried forward to offset either gains in the future or your income tax.
Why do I care? Well if you have a brokerage account there is a chance you have some losses inside that account that can either offset gains or become a tax credit on your tax return. Another benefit of this is now you have free cash you can employ into an area of the market that may have gotten hurt a little more than others. Maybe you can buy a stock that you “missed” out on last time it popped. Tax loss harvesting is something your advisor should be looking into, I know I am looking at it. Give clients the opportunity to capitalize on a loss they have and now have the chance to buy back in while the prices are still low.
Was this topic a little drier than I would like? Yes. It’s important, corrections present great long-term opportunities and this is one.
Harvest those losses and capitalize on down markets.