Tax Loss Harvesting: The Basics


Tax loss harvesting is practicing selling a security that has undergone a loss and afterwards buying a similar one to replace it. This security replacement is important for two reasons: first, it allows the investor to “harvest”, a capital loss on his or her tax return, while still maintaining desired exposure to the asset class. The only way to realize a loss is by selling the depreciated asset (the security).

It is a relatively simple concept yet it is hard to execute correctly when you have many asset classes and even more tax lots within your portfolio.

Sentinel Wealth Management uses sophisticated software which handles this complex task by scanning portfolios daily for losses (temporary drops that result from volatility), that can be harvested. Originally, a service like this would only be available to investors with a high net worth. In present times, it has been made  more widely available than it ever has been. Also, some DIY investors are familiar with the practice, typically harvesting once a year, but using the more effective technique of daily harvesting, it's virtually impossible to implement manually.

Tax Loss Harvesting Strategy and Benefits

You will not be exposed to short-term capital gains in result of an attempt to harvest losses. Through our system we never trigger short-term capital gains in an attempt to harvest losses.

You will have no cash drag. With portioned shares, and smooth handling of all inflows during wash sale windows, every penny is always invested at the desired allocation level of risk.

Your harvests will also be serving as an opportunity to re-balance across all of your asset classes, rather than re-investing within the same asset class. This reduces the need to re-balance during volatile time periods, which means fewer realized gains, as well as better after-tax returns.

You will not experience a loss through overlap with your IRA. A tertiary ticker system is used which eliminates the possibility of permanently disallowed losses due to subsequent IRA activity. This idealizes our tax loss harvesting methods for those who invest in both taxable and tax-advantaged accounts.

Is Tax Loss Harvesting Right For You?

Tax loss harvesting is beneficial for the majority of investors when you are able to write off losses against capital gains and/or up to $3,000 of ordinary income. Any losses that aren’t used to offset returns or ordinary income can be carried forward until used up. The earlier you start tax loss harvesting (and the higher your tax bracket) the more potential it will have to be beneficial over time.