How Tax-Loss Harvesting Helps to Lower Your Tax Bill

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published 13 March 2024

Tax season is here, and many investors are looking at their capital gains and losses in 2023 to determine what they will owe in taxes. Not all of your investments can be winners. But through a tax strategy known as tax-loss harvesting, your losses may be able to help you lower your tax bill.

Tax-loss harvesting is generally considered an end-of-year planning strategy. However, there are opportunities throughout the year to thoughtfully manage your gains and losses in order to plan for your year-end tax bill. Work with your financial adviser to continually review your portfolios and consult your accountant to understand if tax-loss harvesting is appropriate for your situation and you can fully benefit from it.

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When you sell a security at a price higher than you paid for it, you realize a capital gain. Generally, realized gains will be subject to capital gains taxes. Tax-loss harvesting is a strategy to sell securities that have a loss (that is, their current price is less than you paid for them) and use those losses to offset gains on other investments. If done properly, tax-loss harvesting can effectively reduce or eliminate the capital gains tax incurred on realized gains in the same tax year.

A wash sale occurs when you sell an investment at a loss and then purchase the same investment or one that’s “substantially identical” within 30 days before or 30 days after the sale date, excluding the sale date. For example, if you are selling a stock at a loss and then purchase the same stock, a call option of the same stock or a security that is similar enough to the stock you sold, you can trigger a wash sale.

If you’re planning to take advantage of a tax-loss harvesting strategy, it’s very important to be mindful of the 61-day window for triggering a wash sale as you make your investment decisions. For example, if you sell a stock at a loss on January 1, you would have needed to purchase that stock or any substantially identical security before December 2 (of the prior year) or after January 31 to avoid a wash sale.

Purchasing the same or substantially identical security in a different account, for example an IRA, is still a wash sale. If you have multiple accounts, including professionally managed accounts, it’s especially important to keep the wash sale rule in mind. If you sell a security at a loss in one account and your money manager purchases that security in a separate account within the 61-day period, it would trigger a wash sale.

You can “double up” on the security more than 30 days before you intend to sell it (and keep the newly purchased portion)
You can wait at least 30 days after you sell a security before you repurchase it
You could purchase a substitute security for a company in the same sector that may trade similarly, but is not deemed to be substantially identical by the IRS. For example, if you sell one beverage company stock at a loss and buy a different beverage company stock to replace it, this would not be a wash sale as long as the companies are not otherwise linked
You could sell a stock and then purchase a mutual fund or ETF that covers that stock’s sector, and it would not be a wash sale, even if the stock is owned by the fund

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Adam leads J.P. Morgan Wealth Management's Wealth Planning and Advice team, which is responsible for wealth planning, thought leadership and strategic planning for individual clients. This national team of former practicing lawyers provides experience in estate and tax planning strategies, retirement planning, restricted and control stock and stock option management, business succession planning, pre- and post-transactional planning, concentrated position management and other personal planning strategies. The team provides internal training to the J.P. Morgan Wealth Management sales force on these topics and also creates content for distribution to the public.