Sell your losses for a win at tax time

Investing & retirement

See how you can lower your tax bill with this essential strategy that helps investors retain more wealth.

There are two certainties in life, according to the famous expression: death and taxes. And while we can’t avoid the former, we can reduce the latter through tax-loss harvesting.

Tax-loss harvesting is a strategy to lower your tax bill by selling securities you’ve lost money on to offset taxes from sales of stocks you’ve made money on.

“If you sell a stock within the portfolio at a gain, that event may be taxable,” says Frank Delia, a financial advisor with Truist Advisory Services. “Through tax-loss harvesting, you can take strategic losses when necessary to reduce that tax bill at year-end.”

By managing the buys and sales inside a portfolio to be tax-efficient, Delia says, investors can keep more of what they earn. And reinvesting those tax savings can add a lot to a portfolio’s value over the long term.

Watch now: See our video on tax-loss harvesting

Truist Invest technology cannot “see” into other investment accounts held by clients. Wash sales can still occur through other accounts.

A closer look at tax-loss harvesting

Simply put, tax-loss harvesting offsets the taxes on capital gains—your profits from a stock sale—by selling off stocks that are showing a loss. The IRS allows a deduction of up to $3,000 in capital losses in a single tax year (additional losses can be carried forward into subsequent years).

Let’s see it in play:

You’ve invested in Security A and Security B. At year-end, Security A’s value has increased, and you have a realized gain of $7,000. If the $7,000 in gains is taxed at 15%, the resulting tax bill is $1,050.

Meanwhile, Security B has an unrealized loss of $3,000. You can continue to hold the position and wait for its value to increase, or you can realize the loss (that is, sell) and apply that amount against profits from Security A, leaving you with a taxable gain of only $4,000. Taxed at 15%, your new tax bill would be $600. That’s a savings of $450, which you can reinvest or spend at your discretion.

Here’s a handy visual of the same scenario:

Graphic image shows what happens without tax-loss harvesting: You’ve invested in Security A. Security A has realized gains of $7,000. Taxed at 15%, the gains produce a tax bill of $1,050. And with tax-loss harvesting: You’ve invested in Security B. Security B has unrealized losses of $3,000. Offsetting Security A’s gains with Security B’s losses results in a taxable gain of $4,000. Taxed at 15%, the offset gains produce a tax bill of only $600.

Avoiding wash sales

When you sell an asset to harvest the loss, you might want to purchase the same asset, or one that’s considered “substantially similar,” later. But investors are barred from purchasing the same or a substantially identical security 30 days prior to or 30 days after selling it for a loss. If that rule is broken, a so-called wash sale is triggered, and you cannot claim the loss on the original sale.

The IRS goes through a rigorous review of your assets to ensure a wash sale hasn’t occurred. They review all securities you own, securities your spouse owns (if applicable), and securities held by any of your businesses. If the wash sale rule is abused, the IRS can impose penalties and restrict your trading.

Automated tax-loss harvesting

Manual tax-loss harvesting can be a meticulous and time-consuming process—not to mention costly if it’s performed by a financial advisor. Avoiding wash sales adds another layer of complexity.

Yanette Sullivan, a financial advisor with Truist Advisory Services, has had her fair share of client meetings to determine the best way to offset gains.

The Truist Invest automated investing platform can handle tax-loss harvesting automatically. Truist Invest continually seeks opportunities to realize losses that offset taxable gains elsewhere in a portfolio. The algorithms they use identify and avoid wash sales when rebalancing and are impactful for accounts as small as about $20,000.

As a result, tax-loss harvesting through Truist Invest is simpler and more cost-effective than it would be with a traditional financial advisor. And that means, Sullivan says, “You can really focus on your goals as opposed to taxes.”

Truist Invest combines advanced investment technology with support from a team of professional financial advisors from Truist Advisory Services.

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Comments regarding tax implications are informational only.

Truist and its representatives do not provide tax or legal advice. You should consult your individual tax or legal professional before taking any action that may have tax or legal consequences.

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Investment Advisory services, including Truist Invest, are offered by Truist Advisory Services, Inc., a SEC registered investment adviser affiliate of Truist Financial Corporation.