Tax-loss harvesting as an investment strategy has seen a rise in popularity, and in the right circumstances, it can significantly improve after-tax returns on an investment portfolio. However, knowing why and when to implement this nuanced strategy in your clients’ portfolios is key. Senior Aperio Tax Economist Lincoln Fleming, CPA/PFS, CFP, MAcc, has recently published an article in the September issue of The Tax Advisor, entitled, “The economics of tax-loss harvesting” which guides those seeking to understand the context and mechanics of tax-loss harvesting, but also helps advisors determine when the strategy may be suitable for their clients.
While every investor has unique circumstances, to benefit from tax-loss harvesting, investors must have adequate taxable capital gains or other income available to absorb the realized losses. Investors with gains available to offset can begin to explore the potential benefits of tax-loss harvesting which are threefold; reduction of the investor’s current tax liability, tax rate arbitrage if there is a favorable tax differential between the benefit of the harvested losses and the cost of future gains, and tax deferral on the initial tax savings.
In Lincoln’s article, he explores not only the benefits of tax-loss harvesting, but takes time to consider factors that may affect the quantity of harvested losses. Additionally, he explores how these factors might impact the cost basis of the investment portfolio return.
Interested in learning more? Read the complete article at this link.
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