Capital gains are the increase in the value of an investment, business, property, or other tangible asset when you sell it. In other words, your profit. These gains are “realized” when you sell the asset. Before that, “unrealized gains” are not tax eligible.
Tax-loss harvesting can be used to offset capital gains by selling an asset at a loss, and it’s a helpful practice to reduce your taxable income. However, not all financial advisors deploy a tax-smart approach to managing your investments, which can cost you money in the long run.
We analyze clients’ taxable accounts annually to obtain a 360-degree view and ensure no unknowns pop up at tax time. We also constantly monitor the markets and clients’ holdings to take strategic actions that capture tax losses when appropriate. Tax-loss harvesting is particularly important to implement during times of market volatility.
Tax-Loss Harvesting in Action
Recently, we had a client inherit assets from her father in the form of stock. The stock received a step-up basis at the time of her father’s death. When the assets moved into the beneficiary’s account, we used a tax-loss harvesting tool to identify and sell a few stocks that generated over $53,000 in tax losses – actively saving the client over $10,000 in taxes for the year! By utilizing the Tax-Loss Harvester™, identifying these money-saving opportunities for clients could be done in minutes rather than hours.
Strategically developed with a focus on year-end planning opportunities, we also use a capital gains analyzer tool to quickly collect, organize, and calculate mutual fund capital gain distribution estimates and to understand their potential year-end tax impact for our clients. Armed with this information, we can rebalance a new client out of actively managed mutual funds and into stocks and ETFs within taxable, jointly owned investment accounts. By utilizing the capital gains analyzer tool, we saved more than $10,000 in resulting tax liability from capital gains pass-throughs.
These are just two examples where we deployed our knowledge of investments and taxation to help clients optimize their portfolios, even during times of market volatility. Wealth management through a tax-focused lens should be applied across nearly all financial decisions you make — including investing, retirement spending, social security planning, and transferring wealth. Call us today for collaboration, coaching, and customized advice.