Thought Leadership in Action

Stock markets broadly recovered in 2023 from a down year in 2022. The S&P 500, for example, gained 24.33% in 2023 after a 19.44% loss the year prior. But even in a strong market, tax-loss harvesting remains an important tactic for investors looking to offset gains and minimize tax liabilities while maintaining a growth-oriented investment approach.

Clients can benefit from sound advisor guidance when navigating the complexities of tax-loss harvesting, especially when comparing this strategy against their particular financial situation and long-term goals. For example, make sure clients understand that only $3,000 of excess capital losses can be placed against ordinary taxable income, although the remainder can carry over. Likewise, clients should understand the different tax implications of short-term and long-term capital gains and losses before pursuing a harvesting strategy.

Here are a few key areas where financial advisors can assist their clients who are interested in tax harvesting.

Avoid Wash Sales

Left to their own trading, many clients could run afoul of wash-sale rules. They might not understand that by purchasing the same or substantially identical security, or a contract/option to buy the security, within 30 days before or after selling the loss-generating investment, the tax write-off will be disallowed.

Financial advisors play a crucial role in counseling their clients on how to sell down investments for tax-harvesting purposes without jeopardizing the benefits. Importantly, they can help clients consider tax harvesting in the context of a comprehensive investing strategy, rather than overreacting to movement in the market. The goal is to prevent clients from making sales and buys without considering the tax implications — especially when trying to reduce tax liabilities.

One way to avoid wash sales is to consider substituting the sold individual stock with a mutual fund or an exchange-traded fund that targets the same industry. This can help clients who wish to continue investing in a certain sector without violating the wash-sale rule.

Furthermore, wash-sale rules currently don't apply to cryptocurrencies, as they aren't regulated as securities. This means that clients can sell depreciated assets and repurchase them immediately at the same price, potentially realizing the loss while still holding the asset. Stay informed about new regulations or legislation regarding cryptocurrency, as this loophole could be closed.

Consider Doubling Up

Another approach financial advisors can recommend for clients wanting to deploy tax harvesting effectively is to "double up" on the security more than 30 days before the intended sale. By purchasing additional shares of and keeping the newly acquired portion, clients can maintain their exposure to the asset while still realizing tax benefits. Be sure to assess whether the increased concentration in the security aligns with the client’s risk tolerance and overall investment strategy. Doubling up on a security should be done with caution and only after careful consideration of the potential risks.

Alternatively, advisors may recommend clients wait at least 30 days after selling a security to repurchase it. This ensures compliance with the wash-sale rule while still allowing clients to reestablish their position.

Look at Structured Notes

Clients with structured notes can gain downside protection from selling loss-generating positions and reinvesting the proceeds into similar notes. Doing so can reset ‌reset protection levels and potentially lock in higher participation rates. Advisors can recommend this strategy to clients who want to harvest losses and reposition them for better investment terms.

Furthermore, advisors can explore rolling the proceeds from tax-loss harvesting into structured notes, especially for clients who are worried about markets or particular assets continuing to fall. With this approach, advisors can provide a level of downside protection while also preserving the potential for upside if the market