“Thank you for Taking Losses”

Written By: Kevin Reardon, CFP^®

In a recent client meeting, we reviewed the negative returns in the markets and explained that we recently realized losses (sold securities that have lost money) in their taxable account. Although this sounds like less than ideal news to share, the client replied, ‘thank you’!

What is Tax Loss Harvesting?

Tax loss harvesting is a value-add technique where we sell money-losing securities in taxable accounts. These losses offset current and future realized gains and provide you a tax write-off up to $3,000 per year until the losses are used up. There is no limit on the amount of losses you can carry forward to future tax years and the losses last an indefinite period.

Rather than waiting until year-end, it is best to take losses during the year as they materialize. In March 2020, the stock market lost over 30% in less than 22 trading days, then pivoted to head higher. By year-end the market had recouped all losses and finished the year positive. Had we waited until year-end, we would have lost the opportunity to ‘bank’ these losses for use in the current and future years.

This is not to say we should take losses when a security has lost $1 or even $1,000. Typically, it makes sense to take a loss as the percent decline is above 10% of the cost basis, but that is a generalization. It sometimes can make sense to take losses above or below that level. Once a loss is taken, you need to wait 31 days before buying back the same security, otherwise this triggers what is called the “wash sale rule” and the losses are not recognized. Our recommendation is to buy a similar, but slightly different security once you take a loss so your portfolio stays properly invested. This takes advantage of any subsequent higher market moves. Waiting 31 days to reposition your portfolio is not recommended.

Planning for the Future

By taking losses as they develop, you create greater flexibility in future years when we will eventually need to take (realize) gains. For our clients who are in distribution mode and living on their assets, or clients who occasionally access their portfolio to pay for big ticket items such as a car purchase or home renovation, these realized losses help minimize taxes when gains may need to be taken. This strategy gives greater options when deciding what securities to sell.

Although nobody wants losses in their financial accounts, dealing with them appropriately minimizes taxes, provides flexibility in future years and ultimately adds value to your situation.

It didn’t seem appropriate to say ‘you’re welcome’ to the client whose portfolio was down and impacted by market losses. Instead, we thanked the client for their understanding and for appreciating the value we provide, in good times and in bad.

Your Shakespeare Team is working diligently on your behalf during the market downturn and taking positive opportunities as they arise to keep your financial plan on track. We look forward to brighter days ahead, whenever they may be.