A Little Tax Loss Harvesting Never Hurt Nobody

Dear Clients and Friends,

The famous Warren Buffett once said, “The first rule of an investment is: never lose money. Rule number two: never forget rule number one.” Though I strongly believe in the legendary investor’s cardinal rules, the reality is that people do lose money sometimes. Market dynamics constantly change, investment theses sometimes don’t pan out, and behavioral biases play Jedi mind tricks. I wish I could say I’ve never lost money on an investment, but I can’t - thanks a lot, CVS! To be fair, I was young, innocent, and somewhat foolish. To show that I’m not the only one, Amy’s marijuana stocks “blew up,” Greg’s Spirit Airlines had a hard landing, and Matt’s technology ideas had a glitch in the early 2000’s 😉.

Now, thanks to IRS laws and regulations, there is a tax savvy way to utilize your losses in a non-retirement account to reduce your overall tax liability while remaining invested. This strategy is commonly known as tax loss harvesting! Tax loss harvesting allows you to sell your investments at a loss while offsetting other investments you sell for a gain in order to defer taxes.

The taxation of your capital gains and losses is based on how long you’ve held an investment for, i.e. your holding period. If you sell an investment you’ve held for more than a year for a gain, you’re taxed at preferential tax rates (i.e. lower tax rates). On the flip side, if you sell an investment you’ve owned for less than a year for a gain, you’ll pay ordinary tax rates, which range from 10% - 37%!

2025 Long-Term Capital Gains Tax Rates and Brackets

Filing Status	0%	15%	20%
Single	$0 - $48,350	$48,351 – $533,400	Over $533,400
Married Filing Jointly	$0 - $96,700	$96,701 - $600,050	Over $600,050

If you sell an investment for a loss, your losses are compared to any investments you’ve sold for a gain. If your losses outweigh your gains, you’re allowed to use the difference to offset your taxable income up to $3,000 per year.

Here’s an example. Let’s say you get lucky and sell an investment for a capital gain of $100,000. Assuming a tax rate of 20%, you would have tax bills due to Uncle Sam for $20,000. Now let’s assume your best friend told you to invest in the next best Artificial Intelligence idea that turned out to be a complete dud, and you end up losing $105,000. Selling the dud investment and realizing (or accruing) that loss will offset the $100,000 capital gain, saving you the $20,000 in taxes. The $5,000 in unused losses can be used to offset taxable income up to a maximum of $3,000, and you’ll save $600 ($3,000 * 20%) for tax savings of $20,600. What happens with the remaining $2,000 in losses that you never used? They don’t disappear, but rather get carried forward to the following year so that you can offset any future gains or income. Rinse and repeat!

Although the main selling point (no pun intended) of tax loss harvesting is the potential tax savings and deferral, here are some other benefits and risks that MORWM considers.

1) Portfolio Growth – Let’s turn those losses into gains! If you reinvest the proceeds from your tax savings and remain invested, the proceeds have the potential to compound and grow over the long term.

2) Risk Mitigation – Tax loss harvesting allows you to sell expensive or risky investments that don’t align with your personal risk tolerance. It can also be used to rebalance one’s portfolio during market fluctuations.

3 ) Diversifying Away from a Concentrated Position – If you’re fortunate enough to have a large, concentrated position , whether it’s public or private, chances are you’ve owned this asset for a long time and have compounded a substantial gain that’s too costly to sell all at once. Incorporating tax loss harvesting into your transition strategy can help ease the immediate tax hit, defer the taxes, and create diversification. If you were fortunate enough to have taken advantage of a Net Unrealized Appreciation (NUA) opportunity from work, incorporating tax loss harvesting can immensely help in transitioning overtime from the NUA or concentrated holding.

4 ) Volatility Strikes Back – Say another March 2020 hits and the market undergoes significant volatility. By engaging in tax loss harvesting, you can harvest any losses you have accrued during the market downturn and rebalance your portfolios so that when the market eventually rebounds and recovers, you have strategically positioned yourself to reap the rewards.

5) A Smorgasbord of Other Benefits – Other clever ways of utilizing tax loss harvesting that I’ve discussed in great detail in previous weekend readings are Roth IRA conversions, remaining in a lower tax bracket for Medicare premium and Social Security purposes, saving on the Net Investment Income Tax (3.8%), and qualifying for certain tax credits and deductions. Couldn’t investors just take advantage and bank their investment losses while simultaneously buying that same investment back at a cheaper price? The IRS caught on to this strategy back in 1921: the creation of the Wash Sale rule means that you can’t artificially inflate your losses. According to the IRS, a wash sale occurs when you sell a security at a loss within 30 days before or after the sale (a total of 61 days). Take note - most people do not realize that the 30-day rule applies regardless of the order in which you buy and sell the security.

If you do end up triggering a wash sale, the tax loss would be disallowed, and it would instead be added back to your initial cost basis. No biggie!

Given this year’s market volatility, what with the springtime tariff mania and other recent calamities, we’ve been very ACTIVE in harvesting losses and rebalancing client’s portfolios while we weathered the storm and remained invested. We at MORWM never let a good crisis go to waste!

Over time, tax loss harvesting has been proven to improve portfolio performance, reduce risk, and enhance portfolio diversification (according to this white paper from Vanguard.) This is another reason why we ask for a copy of your personal tax return as we integrate all facets of your financial plan with managing your investments.

In conclusion: embrace the Harvest!

Devin