Top 5 Tax Loss Harvesting Tips Story

Whenever the stock market loses at least 10% of its value, as it does most years, those of us with taxable brokerage accounts have an opportunity to lower our tax bills.

Tax loss harvesting is a simple maneuver. You’re selling one asset and buying another. However, it’s often misunderstood and not done in an ideal manner. The tax loss harvesting tips that follow should answer some of your questions and help you make these transactions confidently.

I’ve harvested something close to $300,000 in losses over the past six or seven years. February and March of 2020 were particularly fruitful At this point, If I realized no capital gains, I could use my accumulated paper losses to offset $3,000 of earned, ordinary income for the rest of my life and then some.

#1 Take a big enough loss.

I generally like to see a four-figure loss before pulling the TLH trigger. You’ll notice that in my Vanguard example, I took a loss for under $1,000. Why? Mainly because I wanted to put together the post and I took the first opportunity that came along to demonstrate a loss.

It does take a bit of time and energy to TLH, and it means buying something that you didn’t initially own. It makes having a true three fund portfolio extremely difficult. I wouldn’t bother with tax loss harvesting to take a loss of dozens or a few hundred dollars.

#2 Buy something you’d be comfortable owning forever.

Here’s a dilemma I’ve heard from investors who successfully tax loss harvested but then felt stuck. They had exchanged into a fund they weren’t comfortable keeping. Don’t do that.

What can happen and frequently does happen is a swift rebound in the stock market after you’ve made an exchange. If the market is up a month later, you can’t trade back to your original holding (the asset you sold) without realizing some capital gains and at least partially canceling out the paper losses you previously booked.

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