Tax Loss Harvesting Selling, Mutual Fund Portfolio Screener Analysis Morningstar, Value Line, Lipper, Tax Loss Harvesting Selling, Examples

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Tax Loss Harvesting (TLH)

If you have a taxable stock market portfolio (not IRA or 401K), and you have stocks or mutual funds showing a paper loss, you may benefit from Tax Loss Harvesting. Tax Loss Harvesting is selling securities (stocks, mutual funds, realestate) at a loss to offset your income tax and capital gains tax liabilities. Selling securities with an unrealized loss (paper loss) will now become a realized loss (taxable event).

Example Tax Loss Harvesting

-You invest $100,000 (cost basis) in a taxable portfolio of stocks, stock funds, bond funds and real-estate.

- Over a year later your portfolio is now worth $75,000.

- You sell your portfolio and turn your unrealized (paper loss) into a realized $25,000 loss.

- These realized losses may now be used to deduct $3,000/yr from your earned income, and offset short and long term capital gains (securities and investment real-estate) this year and in the future years.

- Assume your in the 35% Federal Income Tax Rate and 15% Long Term Capital Gains Tax Rate, and your Mutual Funds 1099’s and trading average $2,000/year Capital Gains.

- Your annual tax reduction will be $3,000 X 35% plus $2,000 X 15% = $1,350/yr, more if you add your state income tax savings.

- This tax savings will last for approximately five years or until your $25,000 realized capital loss is used up. $25,000 - $5,000/yr = five years.

- Your $25,000 loss will now become a $6,750 tax savings.

- If you wait for your portfolio to return to $100,000, you will miss the opportunity to reduce your taxable income. Tax Loss Harvesting (TLH) is kinda like virtual money in the bank.

- To avoid the IRS “Wash Sale Rule” you must wait 31-days to re-purchase the same securities or you may immediately purchase securities that are not “substantially identical”.

No Free Lunch

However “there’s no free lunch”. TLH is merely taking advantage of the U.S. tax code by realizing losses now and creating a lower cost basis, and you may eventually pay capital gain taxes if you sell when your securities return to their original purchase price. In this sense, Tax Loss Harvesting acts as an interest free loan from the government; however, your after tax returns will still be higher. Remember instead of giving cash you can give your relatives and charities appreciated securities and pass along your original cost basis.

Fairmark.com has a Free Online Guide to Capital Gains and Losses

The following is a 15-page Research Report used by Financial Planners and Book Authors to justify Tax Loss Harvesting:
http://www.firstquadrant.com/downloads/Loss_Harvesting.pdf

The Bogleheads have several excellent examples about Tax Loss Harvestig (TLH).
http://www.bogleheads.org/wiki/index.php/Tax_Loss_Harvesting

The following are recommending Financial Books explaining Tax Loss Harvesting (TLH)

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