Tax loss harvesting involves the selling of a security that has experienced a loss. By selling the security, the investor realizes or "harvests" that loss and is able to offset taxes on both gains and income. The security that was sold is replaced by a similar one, which maintains the optimal asset allocation.
Tax loss harvesting and diversification are two strategies that go hand in hand. They mitigate any potential tax liability and risk, respectively. For example, if a client wants to diversify out of a large holding of stock, tax loss harvesting allows them to offset any gains from the sale with any current losses. This does not disturb the optimal asset allocation but optimizes the offset that a client can deduct on their taxes, especially if their gains outstrip their losses.
A simplified asset allocation also enhances the tax harvesting process by putting a plan in place to perform the necessary due diligence for both the buying and selling. By having the right securities in place to replace the securities sold, more intrinsic value can be captured from utilizing different types of securities, such as limited partnerships or even other alternative assets.
Simplifying the asset allocation process not only gives investors more variety in their investments but also gives tax professionals more topics to discuss. If a client is invested in certain securities or asset classes, it opens up conversations as to why this is the case. By the merit of a tax professional uncovering needs that has not been addressed, it adds to the effectiveness and credibility that the professional provides.
Did you know....
4Thought has tax harvesting built into our portfolios for easier tax reporting and more effective tax mitigation. Enjoy the tax benefits of a diversified portfolio with a unique investment methodology.