How to Plan Tax Loss Harvesting

Tax loss harvesting, or the practice of offsetting your capital gains tax liability by selling securities at a loss, can help you save on taxes. Short-term capital gains are taxed at a higher rate than long-term capital gains, so using tax loss harvesting keeps your tax rates down.

Instructions

1. Understand the effect that tax loss harvesting has on your portfolio's overall performance. This practice can add up to 1.5 percent gain when implemented regularly. While it's not a tremendous gain, it adds up.

2. Know what securities you can use in tax loss harvesting. Because you're selling to create a loss that affects taxes, you can only use taxable securities. Therefore, you can't use individual retirement plans, like 401(k) plans, and other tax-sheltered plans in tax loss harvesting.

3. Evaluate the fees and transaction costs for selling off securities. If you use the practice too often, you can end up spending more on fees than you save in taxes. Infrequent use, though, should give you savings.

4. Decide when to use tax loss harvesting. Using it quarterly can better offset capital gains taxes than using it either more frequently or annually.

5. Expect to see more benefits from tax loss harvesting when the market is volatile, as a volatile market provides more opportunities for loss harvesting.

Tips & Warnings

• If you don't manage your own portfolio, request that your account manager uses tax loss harvesting. Not all account managers do, although the practice is growing.

• After you sell a security, you can't repurchase it or one that is nearly identical for at least 30 days. If you do, you lose your tax loss.