What is Tax-Loss Harvesting?

    

 

A Conversation with EP Wealth Advisors Director of Portfolio Strategy - Adam Phillips, CFA®, CFP®

Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes Next Gen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.

A Tax-Loss Harvesting Example

Tax-loss harvesting is the practice of selling investments that currently are trading for less than you paid for them, then booking and harvesting that loss to offset a gain you may have taken, or expect to take, that year. Let’s say you bought a thousand shares of Company X a few years ago, and they’re now worth $5,000 less than you paid. If you sell those shares, you can use the $5,000 loss to pay no taxes on $5000 of capital gains that year. Up to $3,000 of a loss also can be used to offset taxes on ordinary income. And unused losses can be carried over from year to year.

Tax Harvesting is a Year-round Process

Our approach to tax-loss harvesting isn’t a December or 4th-quarter story. We do it throughout the year. And it may not involve permanently eliminating the shares we sell from a portfolio. For example, we may see in the 1st quarter that a position we hold has sold off for one reason or another. Our Investment Committee will discuss whether we should sell it and book that loss in anticipation of offsetting other gains we expect later in the year—but then repurchase the stock, because we think it still has upside potential. When using this strategy, though, we need to be aware that there are Internal Revenue Service rules that dictate how it can be done.

Tax-Loss Harvesting Rules

The IRS says you can sell an asset at a loss and harvest that loss, as long as you don’t buy the same asset back within 30 days. This is called the wash-sale rule, and it’s there to ensure people don’t game the system. By waiting at least 31 days to buy an asset back, you’re accepting some risk that the asset may go up in price while you’re not holding it. If you’re using this strategy for tax-reduction purposes, you need to be very thoughtful about that short-term risk, which is something our Investment Committee discusses. In some cases, we may decide the tax benefits aren’t worth the risk.

What is Tax Alpha?

There’s something we refer to as “tax alpha,” which means the value added by being more tax efficient. This potential varies from client to client, because their entry points for a given stock may be different. This causes the amount of unrealized loss they can harvest also to be different. We have tools that let us screen our clients’ portfolios, and identify groups of clients for whom harvesting losses may be worthwhile, and others for whom the added value is insufficient. This underscores how our firm’s big-picture portfolio strategy applies differently to individual portfolios. If we like a given mutual fund for a given asset class, for instance, every client will have the fund. It’s a very customized process beyond that—tailored at the portfolio level by our understanding of the ins and outs of each client’s unique circumstances.

How Can You Benefit from a Strategic Approach to Investing?

With a staff of professionals and access to sophisticated analytical tools, EP Wealth offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.

This is #9 in the Informed Investor “How to Build Your Investment Portfolio” series. Other topics include Asset Allocation, Why We Diversify, How to Buy a Stock, How to Buy a Bond, Concentrated Positions, etc., etc. For more information on our investment process, check out our investment management page or ask for a Portfolio Review.

 

Disclosures:

  • EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented in this report. EPWA has used its best efforts to verify the data referenced. The information presented was obtained from sources deemed to be reliable. However, EPWA cannot guarantee the accuracy or completeness of the information offered. All expressions of opinion are of the presenter and are subject to change without notice.
  • Past performance is not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy, or product made reference to directly or indirectly, will be profitable or equal to past performance levels. Future financial conditions and events can never be accurately predicted. No analysis, plan, or report has the ability to accurately predict the future.
  • Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions with the appropriate professional(s). Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice. Always consult a professional Financial Advisor before implementing or applying any of the approaches or strategies made referenced to directly or indirectly here.
  • Any direct or indirect references to investment allocation, specific securities, security sectors, or any investment vehicle(s) should not be taken as a recommendation or solicitation to buy or sell a particular security or invest in any specific investment strategy. There is no guarantee that any of the information or investment strategies discussed will be suitable or profitable.
  • Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There can be no assurances that a portfolio will match or exceed any particular benchmark.
  • Hiring a qualified advisor and/or diversifying your portfolio do not guarantee investment success, and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any results, projections, or other information being represented in this presentation will be met or sustained.
  • All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions, may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. There is also no assurance that a portfolio will match or outperform any particular benchmark.
  • EP Wealth Advisors, LLC is a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). Registration with the SEC does not constitute an endorsement by the SEC, nor does it imply that EP Wealth Advisors Inc. has attained a certain level of skill or ability.

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