The Basics of Tax Loss Harvesting

| November 9, 2015

Family Business

Kent Patrick, Valdosta Today Financial Contributor

Patrick KentYou may have heard of tax loss harvesting. Some people harvest losses every year, while others do so only when they have taken significant capital gains or have received more income than expected during a given year (perhaps they sold a business, received an inheritance, or collected a sizeable bonus).

Tax loss harvesting occurs when an investor sells an investment at a loss, meaning the investor’s cost basis – the original purchase price adjusted to account for dividends, stock splits, and other factors that may affect the cost of the investment – is higher than the investment’s current market value.

For example, if an investor paid $100 for an investment and sold it for $95, he would have harvested a $5 loss. (If the investment sold for $105, the investor would realize a $5 gain.)

How does it work?

When an investor sells an investment that has lost value, she gains an opportunity to reduce the taxes she owes in the current year and, possibly, in future years. In general, losses can be used to reduce the taxes owed on appreciated investments, ordinary income, or future gains and income.

Choosing a Strategy

Sometimes, if an investor has been holding onto an investment in the hope it will regain lost value, he doesn’t mind selling it to put the loss to work. Other times, the investment is an important part of the investor’s portfolio, and he wants to keep it. In the latter case, the investor has two options:

1. Sell the investment and buy it back. An investor can sell an investment for a loss and then buy it back, but she has to obey the Wash-Sale Rule. Any investor who sells an investment for a loss cannot purchase the investment, or a substantially similar investment, within 30 days before or after the sale. If they do, the loss is disallowed. Spouses cannot purchase the investment in that time frame either. If the loss is disallowed, it is added to the cost basis of the investment.

2. Double up and then sell. Since the objective of investing is to buy low and sell high, selling an investment that has lost value may be disagreeable. If an investor prefers to buy low, he can double up on the investment. Basically, that means double the amount of the investment. After waiting 31 days to avoid wash-sale rules, an investor can sell his original holdings and realize the loss (if the investment’s value has remained low).

During a year like 2015, when markets have suffered some setbacks, tax loss harvesting could prove to be a beneficial way to reduce your tax burden. Before you begin selling investments, it’s imperative to talk with a financial professional or tax advisor so you understand the pros and cons of taking losses.

Kent Patrick is one of our team’s three advisors. He serves on the firm’s investment management committee to create and manage portfolios as well as meet with and educate clients. Kent’s other responsibilities at the firm include preparing financial plans, investment/risk analysis, and keeping the firm up to date with new technology and processes. You can submit questions about this article to

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