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As year-end approaches, do you find yourself busy helping clients harvest capital losses to offset the capital gains their portfolios recognized this year? What if there was a more efficient approach? Using a systematic tax-loss harvesting1 strategy year-round can help build better tax outcomes for clients and be more efficient for your team.
A year-round approach to tax-loss harvesting can be more effective. Capital losses can be collected and set aside to use against future gains and assets held outside of these accounts, such as the sale of a business or diversification of a concentrated position in employer stock. It can also help avoid a year-end surprise due to a capital gain allocation from a 1940 act mutual fund. Rather than having to scramble to find an offsetting loss-harvesting opportunity, a more systematic approach preemptively prepares for tax friction.
Consider asking these questions to identify clients who might benefit from transitioning to a year-round tax-loss harvesting strategy.
- "Did you know that capital losses can be saved up, like coupons, to offset future capital gains?" There are opportunities for year-round tax-loss harvesting even in up markets. Losses don't need to be used in the current tax year. Clients can accumulate tax losses to apply toward gains incurred in the future.
- "What is your long-term plan for your business?" If a business owner is contemplating a sale down the road, implementing a tax-loss harvesting strategy in advance of the sale might be beneficial in helping to offset a future tax liability.
- "Have you considered the benefits of using a tax-loss harvesting strategy to help offset the tax cost of diversifying away from your large, concentrated positions?" All too often, clients accept the risk of concentrated positions in their portfolios to avoid incurring the tax cost of diversification. A tax-loss harvesting strategy can be used to offset the gains built up in their concentrated positions.
Bottom line: Incorporating a year-round tax-loss harvesting strategy into your clients' asset allocation is one way to help improve after-tax outcomes while also taking some of the year-end pressure off your team.
"Using a systematic tax-loss harvesting1 strategy year-round can help build better tax outcomes for clients and be more efficient for your team."
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1. Tax-loss harvesting isn't beneficial in a retirement account because the losses generated in a tax-deferred account cannot be deducted.
Investment strategies that seek to enhance after-tax performance may be unable to fully realize strategic gains or harvest losses due to various factors. Market conditions may limit the ability to generate tax losses. Tax-loss harvesting involves the risks that the new investment could perform worse than the original investment and that transaction costs could offset the tax benefit. Also, a tax-managed strategy may cause a client portfolio to hold a security in order to achieve more favorable tax treatment or to sell a security in order to create tax losses. Prospective investors should consult with a tax or legal advisor before making any investment decision.
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