3 Things To Know About Tax Loss Harvesting

November 23, 2015

But you can replace a losing security—say, a health care company stock—with a strategy that offers similar exposure such as a health care ETF.

“Here, you would not be subject to the wash sale rule, assuming the IRS does not view it as a ‘substantially identical’ security,” Fidelity said. The 1,800-plus U.S.-listed ETFs provide low-cost access to just about every corner of the market, so it’s easy to do that today.

  • Short-term gains are taxed differently than long-term gains

Short-term gains—or capital gains on any investment you’ve owned for less than a year—are taxed at a higher rate than long-term gains, which are those on investment you’ve held longer.

Consider this data from Fidelity: Short-term capital gains, which are taxed at the marginal rate you pay on ordinary income, can top 39.6%. For some high net worth individuals, that rate is even higher, exceeding 43%, plus state and local income taxes.

By comparison, “for the majority of taxpayers,” the long-term capital gains tax rate is 15%.

If you are going to implement a tax-loss harvesting strategy, you might want to apply those assets toward offsetting short-term capital gains first.

  • · ETFs are tax-friendly vehicles

It’s rare to see an ETF report capital gains distributions. It happens, but by and large, broad-based passive funds rarely do. It’s a different story with mutual funds, however, which makes ETFs very attractive for tax-aware investors.

Picking investments for tax purposes alone isn’t the right call, but managing taxes wisely can keep more of what you earn in your pocket.


Contact Cinthia Murphy at [email protected].

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