On this week's episode, Brad Lyons, CFP®, Investment Manager, and Jordan Sute, CPA join Casey Smith to discuss tax loss harvesting. Tax loss harvesting is looking at a loss in your portfolio, selling it so that you can sell off the loss, and then reinvesting it into something else. This technique leverages a circumstance in your portfolio to enhance your tax standing. Just because you sell something doesn’t mean it’s bad. Most advisors don’t even think to do this.
What is the difference between the two? The difference is one year. If you hold an asset for one year, it is classified as long term. Short term gains are taxed at ordinary rates whereas long term gains are taxed at capital gains rates. There are no Capital Gains taxes up to $80,000 in income.
Covid’s effect on the market ended up being very temporary, but at the time, we didn’t know if that would be the case. At Wiser Wealth, every morning Casey and Brad would get together to decide if that day was the day to rebalance the portfolios. In those moments, you don’t actually know what the next day will hold, so you just have to make the best decisions you can based on your experiences and information you are receiving.
In moments of market stress, it is wise to think about how, as an investor, you can take advantage of the situation. At Wiser Wealth, we have shadow portfolios that serves as a backup so that if we didn’t have one security, we already knew which one we would want to replace. It works the same way in our Flightpath program through Betterment, where it is going to automatically do tax-loss harvesting as it sees opportunities.
Solo advisors might not feel confident to do this on their own inside their portfolios. It adds to the rate of return after tax overall. As an advisor, when we look at the portfolio, we can be much more objective. As a DIYer, it is much harder to sell securities because there are a lot of emotional attachments to the securities. The idea of tax-lost harvesting is to buy the same value of the car so that the portfolio stays net.
4:49 Short Term and Long Term Losses
8:15 Making Decisions Based on What You Know Today
13:16 Take Advantage of the Situation
15:52 Something a Lot of Advisors are Missing
Learn more about Brad Lyons.
Learn more about Matthews Barnett.