At Bloom Advisors, we focus on strategies that help our clients grow and preserve wealth over time.  One strategy that can quietly add value to a portfolio—especially during volatile markets like today—is tax loss harvesting.  While not widely understood outside the financial planning world, this technique can help investors reduce their tax liability and reinvest those savings to improve long-term outcomes.

What is Tax Loss Harvesting?

Tax loss harvesting involves selling investments in a taxable account (also known as a non-retirement account) that have declined in value to realize a capital loss.  Investors can use that loss to offset capital gains elsewhere in their portfolio—whether from other investments sold at a profit, mutual fund distributions, or even, in some cases, ordinary income (up to $3,000 annually).

After harvesting the loss, the proceeds are typically reinvested in a similar, but not substantially identical, investment to maintain your desired market exposure, allowing your portfolio to remain aligned with your long-term strategy while securing a tax benefit today.

It’s important to note that tax-loss harvesting only works within taxable investment accounts. This strategy cannot be employed in tax-deferred accounts, such as IRAs and 401ks, because their tax-deferred status means they aren’t subject to capital gains taxes.

Why Does This Matter in a Long-Term Portfolio?

Many investors focus on long-term gains and hold investments for years, which is a sound strategy—however, even a long-term portfolio benefits from active tax management.  Losses can occur in any market cycle, and taking advantage of them—without disrupting your broader plan—can be a smart move.

Over time, the tax savings harvested annually can compound.  You may improve your portfolio’s after-tax performance by reinvesting those savings, especially if done consistently.

Year-Round Benefits

While many think of tax strategies as something to consider at year-end, tax loss harvesting can be a year-round opportunity.  Market pullbacks throughout the year can create opportunities to harvest losses and reposition the portfolio.  This proactive approach gives investors more flexibility and helps avoid a rushed, last-minute scramble to harvest losses in December.

Current Tax Loss Harvesting Opportunities

As we perform formal portfolio reviews, which we do quarterly, we are currently seeing tax loss harvest opportunities in areas like U.S. small and mid-cap stocks and bonds, such as municipal or tax-free.  However, we look at every position for opportunities to take losses where possible.

A Word on Compliance: The Wash Sale Rule

As we review client portfolios and find opportunities to harvest losses, we pay close attention to the IRS “Wash Sale Rule.”  The wash sale rule prohibits claiming a loss if you buy the same or a “substantially identical” security within 30 days before or after the sale.  For example, if we sell Schwab or Fidelity S&P 500 Index Funds to realize losses, we cannot buy another S&P 500 Index Fund.  Instead, we would purchase a fund or exchange-traded fund (ETF) like the Vanguard Russell 1000.  Please be aware that the rule also applies when you sell an investment at a loss in a taxable account and then buy it back in a tax-advantaged account.

At Bloom Advisors, we navigate this carefully to ensure we fully realize the benefits without triggering unintended tax consequences.  We also attempt to understand a client’s full tax picture, considering any outside taxable assets or potential loss carryforward amounts.

The Bottom Line

Harvesting tax losses is about tax efficiency, not market timing.  When done thoughtfully and strategically, it can help reduce your tax bill, free up capital for reinvestment, and improve long-term results.  This is another way we work behind the scenes to add value to your investment portfolio.

If you’d like to learn how tax loss harvesting might benefit your portfolio, we’re here to help.