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How The Wealthy Harvest Losses For Gain

As part of investing and advising and reviewing, family offices routinely look for ways to optimize their after-tax returns through tax loss harvesting.

Below are some tips from the pros.

  • Look for opportunity. Investors can often overlook capturing tax losses as they focus on portfolio construction and evaluating manager performance. Family offices know that the only returns that matter are those that they keep, after taxes. Although family offices do this routinely at the end of the year, investors should be in the habit of evaluating whether to sell investments to recognize a tax loss whenever the market is volatile. This does not necessarily eliminate tax liability, but rather functions as an interest free “loan” that defers capital gains taxes into the future. Although tax loss harvesting doesn’t eliminate your losses, if done strategically it can very much soften the blow as those losses can be used to offset gains that you would otherwise have to pay taxes on.
  • Understand your specific scenario. The value of tax loss harvesting depends upon the investor’s individual situation, including their income level and the amount of short-term and long-term capital gains in their portfolios. Short-term and long-term capital gains are taxed at different levels. Investors incur a short-term capital gain on investments that they sell at a profit after less than a year. These gains are taxed at the marginal rate paid on ordinary income, which federally can be as high as 43.4% for investors in the highest income tax bracket of 39.6%, and are also subject to the net investment income tax of 3.8%. Long-term capital gains, which are triggered on investments held for more than a year, can be federally as high as 23.8%, composed of a 20% capital gains tax and the 3.8% net investment income surtax.

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