One of the most valuable yet sometimes overlooked investment strategies is tax loss harvesting in taxable accounts. Another prudent approach is trimming highly appreciated and over-weighted positions. Given the market volatility this year, investors may have had opportunities to harvest losses, while also considering reducing large gains in certain stocks following two great years in the stock market.
The Importance of Tax Loss Harvesting
Tax loss harvesting is particularly beneficial in non-qualified accounts because it allows you to offset gains either in the current year or in the future. By reducing your tax burden, you retain more capital to stay invested and compound returns over time. When applied strategically each year, this approach can have a powerful impact on long-term wealth accumulation.
For long-term investors who have held portfolios for many years, opportunities for tax loss harvesting may be limited—especially if they are no longer making new contributions or if turnover in their accounts is kept intentionally low. This is often the case for elderly or ill clients with significant unrealized capital gains, where a step-up in basis for beneficiaries is expected.
A common question we receive is: Why take a loss now—shouldn’t we wait to see if the security rebounds? The answer is that selling a security at a loss does not mean exiting the market altogether. We typically reinvest proceeds into a similar investment, preserving the opportunity for appreciation while capturing a tax benefit. Additionally, after 31 days, we have the option to repurchase the original security while still retaining the realized tax loss.
Trimming Highly Appreciated Stocks: Managing Risk and Taxes
Another frequent concern is about selling stocks that have experienced tremendous growth. Why not let them continue to climb? The answer is twofold:
- There is no guarantee they will continue rising.
- As a stock’s value increases, it may become an outsized portion of your portfolio, exposing you to undue risk.
- As a stock’s price increases, it may become expensive relative to its company’s earnings and become vulnerable to falling in price.
While selling appreciated stocks may generate capital gains taxes, the risk reduction typically outweighs the tax cost. Additionally, if we have harvested losses elsewhere, they can help offset the taxable gains, though this is not always guaranteed. Please note that if you requested us to send you money during the year for a renovation or a new car, for example, we were likely to sell stocks because the market had been up for a while. In this case we typically look to trim over-weighted positions as a source of part/all the needed funds.
The Bottom Line
At times, the actions we take in your portfolio may seem counterintuitive. However, every decision is rooted in sound financial principles that have been evaluated over time and proven to be prudent. By strategically harvesting losses and trimming gains, we help optimize after-tax returns, manage risk, and position your portfolio for long-term success.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Withum Wealth Management (“WWM”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from WWM. WWM does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WWM’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. WWM is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the WWM’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.withumwealth.com. If you are a WWM client, please contact us in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing, evaluating, or revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please also remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
