As you know, the second half of 2015 through mid-February was a rough patch in the global stock markets. Investors can choose to do nothing and wait for their holdings to recover over time as they always have or to take action. As your portfolio manager, in cases where we judged losses were sufficient to justify the expense of trading, we entered into trades in taxable accounts called “tax-loss harvesting”.
Tax-loss harvesting involves selling a security that has lost value in your portfolio. By disposing of the asset at a loss, also known as realizing, or harvesting, we seek to offset capital gains taxes. Even without capital gains to offset, selling depreciated assets allows us to help you reduce current ordinary income by $3,000 or carry the loss forward to future years. Sometimes we refer to this proactive approach as “making lemonade out of lemons”.
After we sell the loss-making funds, the proceeds are often used to purchase a similar investment. We typically harvest losses in conjunction with rebalancing your portfolio so that the trades also bring your portfolio back closer to your target allocation. Some clients with taxable accounts witnessed more than one round of such trades as markets continued to decline.
Perhaps an example will help to illustrate:
Source: Vanguard Research – “The glass half full: the silver lining of capital losses” June 2013
It is our hope that this note explains the concept of tax-loss harvesting and provides some context as you and your accountant review the realized gains/losses on your Tax Year 2015 Year-End Summary from Charles Schwab. Please feel free to call us if you would like to discuss how tax-loss harvesting may have affected your tax position in 2015.
