As an advisor, you know firsthand that taxes can consume a significant amount of your client's investment returns and income each year. Acting as their trusted financial guide, your goal is to help them retain as much of their wealth as possible. Tax-loss harvesting presents a resourceful strategy to help your clients reduce their tax liabilities by offsetting gains and/or income.
By integrating tax-efficient strategies like tax-loss harvesting into your practice, you can provide proactive value, differentiate your services, and strengthen client relationships. Keep reading to learn about tax-loss harvesting and how you can help your clients keep more of what they earn.
Tax-loss harvesting is a tax strategy that allows you to sell investments at a loss to offset capital gains and reduce taxable income. This approach helps clients strategically manage their tax liability, particularly when they have experienced market fluctuations or unexpected taxable gains. By harvesting select losses, you can lower taxes on gains and reinvest the money into similar securities to maintain market exposure.
Tax-loss harvesting can play a critical role in long-term financial planning — especially for your wealthy clients. It allows them to minimize their tax burden by using their losses to offset gains or even ordinary income, depending on the client's financial situation. However, careful management is required to avoid wash sales, which may invalidate the tax benefits.
Capital losses play a central role in tax-loss harvesting by providing an opportunity to offset gains (or ordinary income) or reinvest in new investments. For an advisor like you, the value lies in strategically pairing losses from underperforming investments with gains from successful ones. By doing this, you can reduce your clients' overall tax burden, especially on short-term capital gains, which are taxed at higher rates.
Another layer to consider is the potential for using harvested losses to offset ordinary (wage) income annually. This creates flexibility in managing your clients' taxable income beyond just their investment portfolio.
A wash sale occurs when an investor sells a security at a loss and repurchases the same or a "substantially identical" security within 30 days before or after the sale. This invalidates the tax deduction for the loss in the current year, which negates the purpose of tax-loss harvesting.
Advisors can help clients avoid a wash sale by carefully tracking trade dates and recommending alternative (but not identical) investments for at least 30 days after the sale. This maintains the portfolio's exposure while preserving the tax advantage for the current year.
Advisors can leverage tax-loss harvesting as part of broader tax optimization strategies to enhance their clients' after-tax returns. Here are some key strategies to consider:
Advisors can use realized losses to offset capital gains, such as after the sale of another asset being sold for a profit. This is especially true with short-term capital gains (investments held for a year or less) that are taxed at a higher rate than long-term capital gains. Your client may benefit from offsetting a short-term capital gain by selling off an underperforming investment.
You can deduct up to $3,000 of losses against ordinary income each year, which could offer an added bonus in reducing overall taxable income. Losses that exceed $3,000 may be carried forward indefinitely to offset gains or income in future tax years.
Tax-loss harvesting provides an opportunity to rebalance portfolios as markets change. As your clients sell assets that have depreciated or may be considered overvalued, they can reinvest the funds in similar, but not identical, securities to maintain portfolio alignment or different securities to change their portfolio construction. This might be a strategy to help clients move away from securities believed to be fully valued but invest in something else that is considered to have more growth potential.
Your strategy to harvest losses might come during high-income years or when clients anticipate significant capital gains that they want to offset taxes for. However, you can be strategic about when you utilize the harvested loss as those numbers carry forward. This means your clients can sell at a loss now and carry forward those capital losses on a future tax return.
State income tax laws also can impact what your clients pay in capital gains. As part of your tax-loss harvesting strategy, you should be aware of state-specific rules to help guide clients based on their residence(s). These rules vary by state.
As a holistic financial advisor, you want to consider every angle of your client's wealth management and investing plan. Integrating tax-loss harvesting strategies when relevant allows you to create tax efficiencies that contribute to supporting your client's long-term financial goals.
The number one reason advisors might choose to recommend selling assets at a loss for tax-loss harvesting is to offset gains they made with the sale of a different asset. Advisors can reduce their clients' tax burdens by strategically selling losing positions to offset short-term capital gains, which are taxed at higher rates. Monitor your client's investment holdings in case it is prudent to sell select assets at a loss so that they can offset taxable gains.
In years without significant capital gains, clients could use harvested losses to offset their ordinary income as a part of their tax reduction strategies. This flexibility allows advisors to provide value—even in down markets—turning losses into ongoing tax relief.
One benefit of tax-loss harvesting is that excess losses can be used in the future. This is an accrued tax benefit that is carried forward and can be used to offset future gains and income.
Sometimes, tax-loss harvesting provides a better way to think about capital losses—explain to your clients how a loss now can provide tax relief for gains in the future and support a long-term investing strategy.
To make the most of tax-loss harvesting, you will want to help your high-net-worth clients understand how to best reinvest the tax savings from harvested losses for continued growth potential. Take time to proactively identify reinvestment opportunities that align with your clients' goals and boost long-term returns.
During volatile markets, it usually makes sense to harvest losses and reinvest the proceeds in securities that maintain market exposure during the harvest period. You can help clients reinvest proceeds from sold losses into similar, but not identical, securities (without violating the wash sale rule) so they retain holdings in the market despite taking losses.
When opportunities for tax-loss harvesting arise, you should focus your attention on potential portfolio rebalancing. While tax-loss harvesting typically involves reinvesting in similar securities, you could take this opportunity to shift the portfolio to something that better aligns with your client's changing risk tolerance or investment goals.
Don't let your clients fall victim to the most common pitfalls associated with tax-loss harvesting. Here's a breakdown of the common misconceptions and risks you are likely to face:
A common misconception is that clients can sell a stock at a loss and immediately buy it back to maintain their portfolio's position. However, the Wash Sale Rule prohibits deducting a loss if a "substantially identical" security is purchased within 30 days before or after the sale. Advisors must carefully plan and use alternatives (like buying a similar, but not identical, security) to avoid causing a wash sale.
Don't let the tax tail wag the dog. In investing terms? Don't get so focused on the tax outcome that you let it drive your investing decisions. Investing is your primary focus and tax management should be secondary as you help clients drive their financial goals.
Some clients may focus too much on avoiding taxes, such as remaining in an investment or strategy too long simply to avoid realizing a capital gain. While tax savings are important, a primary goal is usually long-term investment growth. Prioritizing short-term tax benefits over a solid investment strategy can lead to poor asset allocation and missed market opportunities. Help your clients meet long-term financial goals by balancing tax strategies with broader wealth management strategies.
To keep your client's assets properly balanced, you want to reinvest any capital gains or losses back into the market. It's important not to let proceeds from the sales sit in cash where they won't grow (or grow at a very low rate). Advisors should help clients quickly understand their options so they can choose how to best utilize money from sold assets to support long-term financial growth.
Your clients may panic during market downturns and might be tempted to use tax-loss harvesting as an emotional response to sell off underperforming assets. As an advisor, it's your job to help clients stay objective and hold to the investment strategy you have in place. It's important to use tax-loss harvesting strategically rather than as a reaction to temporary market volatility or trying to guess what the market will do.
Here are the best practices for tax-loss harvesting that can guide your advisory operations and client discussions.
The temptation to focus too much on near-term tax benefits could lead to suboptimal investment decisions. Keep the broader financial picture in mind.
While tax-loss harvesting can reduce immediate tax liabilities, it's crucial to balance this with the client's long-term investment objectives and remain invested. If you over-prioritize tax savings, it can disrupt a client's asset allocation and investment strategy. Talk to clients about how tax-loss harvesting fits within their overall financial plan, not just as a short-term fix.
Managing compliance with the wash sale rule across multiple accounts or platforms can be tricky. Make sure you have systems in place to track trades across accounts or custodians as wash sales are applied at the household level.
Avoid repurchasing "substantially identical" assets within the 30-day window to preserve the tax benefit. You should develop a process for tracking trades to ensure wash sale rule compliance and use this opportunity to identify suitable alternative investments to maintain market exposure.
Clients may associate losses with failure and resist harvesting. Speak to clients about using downturns strategically, rather than reacting emotionally to short-term volatility.
Market downturns can present opportunities to sell at a loss and reinvest funds back into the portfolio with a different security. Help your clients understand that realizing a loss can be a smart tax-saving strategy, not just a sign of poor performance. Use tax-loss harvesting as a way to rebalance portfolios without triggering significant taxable gains.
Tax-loss harvesting is only effective in taxable accounts.... However, it's important to be aware of all taxable assets that could impact your strategy—including any accounts owned by their spouse. The wash sale rule applies to your client's household, not just a single account.
Are you concerned that monitoring and harvesting losses could put a strain on your team? You can simplify the process and apply automated tax-loss harvesting with AssetMark's Tax Management Services (TMS).
TMS is an easy-to-use, turnkey solution that provides insights around tax-loss harvesting and other tax-smart strategies throughout the year. This means you can deliver consistent, proactive tax management daily to take advantage of market opportunities.
By integrating AssetMark's TMS, you strengthen your advisory service and help give clients peace of mind with detailed reports, personalized tax planning strategies, and tax-efficient investing guidance.
Want to learn more about how you can scale your practice, win more clients, and provide ongoing value with tax management through TMS? Reach out and schedule a free consultation with our team today!
Important Information
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information has been drawn from sources believed to be reliable, but its accuracy is not guaranteed and is subject to change.
Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.
The Tax Management Services (TMS) is designed to improve the after-tax return for the client's account, consistent with the risk/return profile of the investment models based on the selected tax sensitivity. TMS may cause the account to deviate from the investment models and can affect the risk profile and performance of the account. A higher tax sensitivity account setting can have a higher deviation from the investment models than a lower tax sensitivity. Adding TMS customizations to the account can impact the account's tax and investment results. Tax analysis proposal reports may vary over time. Actual tax management results are subject to change based on investment holdings, market conditions, timing, and other factors. Securities may be partially traded or not traded due to market movements and illiquidity, rebalancing, client activity, and other factors. The account may be invested in non-model securities intended to approximate the target investment models. AssetMark, at its discretion, will determine when to take tax management actions based on any client restrictions or other instructions, such as client withdrawals. The timing of trading in TMS accounts may differ from non-TMS accounts. If an investment strategy is closed, the closed strategy may no longer be TMS-eligible; and AssetMark may provide an alternative TMS-eligible strategy.
The tax savings report is not a replacement for other tax reports for tax filing purposes. Investors seeking more information should contact their financial advisor.
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7447794.1 | 12/2024 | EXP 12/31/2026
For financial advisor use only.