What is Tax Loss Harvesting?

Hi, I’m Brad Tatar, Senior Vice President and Wealth Advisor at GreenUp Wealth Management. Anyone who owns a house is usually surprised at how much their house is worth when they look at an estimate on Zillow, or they find out what a neighbor’s house just sold for. And anyone who’s owned a house for a while knows that, even though their house has gone up in value, not all parts of that house are worth more today than they were many years ago.

We love talking about the joys of home ownership: fixing the plumbing, replacing the flooring, patching a leak in the roof, or remodeling a bathroom. While home maintenance can be a headache, getting rid of the unattractive, problematic, or broken parts of your home often creates more value in the future.

Just like a house, your investment portfolio may have components that should be replaced, and that’s where Tax Loss Harvesting comes in. Tax Loss Harvesting involves selling investments at a loss to offset the taxes you owe from selling profitable investments. Let’s look at an example. Let’s say that so far this year, you have realized gains of $10,000.

Let’s also assume you bought Home Depot stock near the end of 2021 when it was at its peak and now it’s worth $6,000 less than you paid for it. Using a Tax Loss Harvesting strategy, you sell your Home Depot stock for a $6,000 loss, offsetting your short term gains of $10,000. This reduces your short term gains to $4,000, which reduces your taxes for this year.

If you still want to invest in a home improvement store in your portfolio, because, after all, you’re spending lots of money fixing things in your house, you can buy back stock of a similar company. Say, for example, Lowe’s. Or, you could also get a completely different company. Or, you can buy back Home Depot stock in the future.

But be careful of the Wash Sale Rule, which is a topic for another video. Of course, Tax Loss Harvesting only applies to taxable investment accounts and not retirement accounts, which are already tax advantaged. At GreenUp, we believe in using Tax Loss Harvesting as a useful tool to reduce current taxes.

And by reducing your tax bill, you’re left with additional funds to invest for the long term. After all, it’s not about what you make, it’s about what you get to keep. At GreenUp, we’ll work with you on tax loss harvesting and other tax reduction strategies. Not just at tax time, but throughout the year.

Before implementing any tax strategy, talk to your accountant or your tax advisor. I’m Brad Tatar. Thanks for watching.