What is tax-loss harvesting? It’s a way to create a tax asset
From: Rob Kuharic
Executive summary:
- Investment gains in a portfolio create value. But you can also create value by creating taxassets that help minimize the amount of taxes paid
- Tax-loss harvesting is an essential tax-management strategy that can benefit a broad rangeof taxable investors – even those who many not think they have to worry about investmenttaxes
- Advisors conducting tax-loss harvesting on their own should be wary of potential pitfalls andmay wish to seek expertise to ensure their clients are in the right solutions to maximize theirafter-tax wealth
There are a number of ways to create value when investing. The main way most investors think aboutcreating value is through purchasing an asset like a stock whose price rises. That price increase equals aprofit and therefore has created value.
But…. How does this work in a taxable portfolio? Profits are taxed. The profit that was created is thereforePre-tax Value. After-tax, the profit is going to be lower; and in many cases it can be a lot lower. What can bedone about that, if anything? There is another type of value than can be created within an investmentportfolio: a Tax Asset. What is a Tax Asset, what is it good for, and how can you create it, you might wonder?
A Tax Asset is a type of credit that can be used to lower, and in some cases, eliminate, the tax liabilityassociated with a profit. Now we are getting into creating After-Tax Value!
And how do you create this Tax Asset? You do it through tax-loss harvesting.
