Yes, You Can Still Find Tax-Loss Harvesting Opportunities in 2024
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Welcome to investing insights on your host market, gals. U. S. Market has been red hot, so there's a good chance that your investment portfolio has made some significant gains this year, but you might have to brace for a hefty tax bill if you hold those investments in a tax ball.

Account tax or selling might help you lower that tax bill. What you have to do IT, right? Christian bands, director, personal finance and retirement planning for morning star.

We talk about how taxi selling works and who IT works for as well as where investors might find lost opportunities in their portfolios. Here's our conversation. Well, thanks for being here today, Christine. I really appreciate .

Margaret is great to see you.

All right? So I want to talk about taxi selling. It's kind of relevant for this time of year. So let's start with the basics. What is taxi selling and who should really be .

thinking about IT? So texas selling means that you're going to take a look into your portfolio and look for securities that are now selling at a Price below what you purchase them at or your costa es. So in terms of who should be looking at, uh, texas selling, well, IT is an activity that will be almost exclusively focused on your taxable accounts.

So if you have tax sheltered accounts, technically, you could do texas selling, but you'd have to liquidate your whole array in order to engaging in texas selling. So not recommended for most people. This is generally you have taxi broken age accounts, the ideas that you are looking into your account. And if you have losses in that portfolio and the reason to consider IT, especially in a year like this year where a lot of people have gains in their portfolio, is that you can use those classes to offset capital gains. And in turn, the the impact the tax impact of those capital got IT.

So it's really just tax accounts. Let's keep IT there and get away from the tax shelter. Yes, I can. Um is there a limit to how much you can offset and how .

does that work? So in terms of the a capital loss that you can take to offset capital gains that has unlimited and you can also Carry them forward in the future years, so say if in twenty twenty four, you have a lot of taxi ble losses for some strange reasons and and you um do not have off setting capital gains while those losses can be Carried forward in perpetuity. Um the limit comes in if you have exhausted your capital gain. So you're your capital losses have sop up all of your capital gains and you still have leftovers, you can use them to offset up to three thousand dollars in ordinary income that uh three thousand dollar thresh holder has not changed for a couple of decades now. Um but IT is something that you can do if you uh loss is more than offset your gains.

Okay, cool. So you mentioned your cost spaces. You know how much you paid for your investments and that's key defining those lost opportunities, right? But there's a different couple of different ways to calculate or uh, consider your cost spaces. And you know maybe there are couple things to consider as you're uh, looking at that. So what are those different methods and what should people think about?

Yeah, I don't think there's enough attention paid to this mark. There are different methods of electing to track cost basis um and very often, people are just defaulted into whatever their investment firm or brokers firm is using. So it's very common for people with individual stack portfolios.

They use what's called the first in first out method. So the security that you bot first are assumed to be the ones that you're selling. If you don't sell that whole position, they're going to assume you so are selling.

Those are first purchased securities first, and they'll tend to be pretty tax on friendly, right? If they're selling, if the market usually goes up and they're selling the ones that you purchase first. So um it's often wise to overwrite there and use what's called specific share identification that actually gives you the ability to Cherry pick where you go.

If you're doing tax loss selling lets you Cherry pick individual lots that are most advantages for you to sell at any given point time. So that particularly valuable for stock investors where you're probably purchasing at different intervals, you may be selling at different intervals. IT just gives you the highest level of control.

If you're a mutual fund investor, the typical default cost basis is a what's called the averaging method where they're averaging all your different purchase Prices together. It's never going to be the best method because IT is an average is the simplest and it's what many fund investors go with. And it's important to note, Margaret, for people who have used the averaging method and they've sold things from that mutual funpack folio, you have to stick with that cost species method. You can change IT around um so people need to know what type of cast basis election they have selected and use that to inform that the choices that they're able to make with in terms of of tax selling. God.

that's really helpful. I think that sounds like one of the ways that you know this strategy. You can go a ride, right? If you're not if you think your cost spaces is one thing, but it's actually another because you've kind of fall into the default.

Certainly good to think about. So how else can tax or selling go right? One thing that comes to mind is the R S washed vero. Um can you talk about what that is?

Yeah, so is the idea with tax loss selling. If you take a tax loss and you want to try to use that to offset capital gains or maybe even an ordinary and come as we are talking about, the issue is that you can't go out and buy what the I O S calls a substantially identical security within thirty days of having sold that security and book to law. So a good example here would be I have a total market fund um and I want to sell IT.

Of course, total market fund be way up this year, but if it's twenty, twenty two again, for example, in total market fund is down and I want to try to sell, I can't buy I can't sell the traditional mutual fund and swap into the etf within thirty days of having made that sale. So that's substantially identical. Same would go if i'm a stock investor and I sell out of a stock and I want to buy another share class of that same stock cannot do that either um but there is a lot of flexibility in the realm of oh, I want to sell this actively managed fun that I don't like a large say a large growth fund and by a large growth etf, perfectly fine.

Same with um I want to sell x individual stock and buy another stock in the same sector a OK or by uh maybe an etf tracking that sector. That's totally fine, too. So you have quite a lot the way. But um I would just be careful about monkey around with securities that are pretty like in terms of the economic exposure that they offer.

You got IT. So at least there's that flexibility right, where you can essentially have a fund, for example, that fits a role in your portfolio, but you're able to tweak the activist is passive, for example. And so you're still kind of filling that role, but the IOS isn't treating that as what is that substantially?

I done exactly, exactly. And it's important to to remember that often times the security you that you might have the losses and they may be cheap, that they may be industries or you know areas where you would want to maintain economic exposure. So uh, there may be a real sort of portfolio fundamental case to maintain exposure to that same area, just do IT in a different way.

absolutely. So you've already eluded this a little bit. The markets are up this year. Why should investors think about taxi selling right now?

Well, because the markets have been up that many investors do have gains in their portfolios that they might like to um realize. And that entails a tax bill unless you have offsetting losses. And another thing that we have going on right now, we sort to have this in the fourth quarter of every year.

We have mutual funds making these capital gains distributions. Taking tax losses elsewhere in your portfolio is a way to offset those gains and in turn, the tax bills associated with them. So it's worth looking around from a practical standpoint, if i'm someone who has kind of a plain vanilla portfolio of broad market mutual funds.

Um whether i'm going to be able to turn up a lot of texas sale candidates is an open question. But there are a couple of areas where I would urge people to to take a look. One would be um if people had been buying fixed income investments, uh, within the past couple of years and they had been leaning into long term bonds, that was a really popular trade coming into twenty twenty three because we thought interest strates were onna drop really rapidly, didn't really happen that way.

So many investors do have losses in their portfolios in in the long term bonds, especially long term government bonds. Um so you may be able to light up on those positions, take losses there, perhaps get into a portfolio that's more sort of in the intermedia to short zone. So that's one area to consider.

If you look at emerging markets, we've seen some losses in certain um markets. China in particular has been under a cloud. And so people who have china specific exposure may have losses in their portfolio.

Let amErica very recently has had losses. And then I would also say Margaret four n individual stack investors, I think there are much Better opportunities even for U. S.

Stack investors. The U. S. Market has been great.

But I was looking last night, actually eleven hundred and companies, uh, global, global companies. So U. S. Now us, with market caps of more than a billion hallows ses of more than ten percent over the past year and a similar number of like sized companies have ten percent or greater losses over the three year period. So if you are an individual stack investor, you do have um A A greater likelihood of being able to una una some losses and then you can do some repositioning elsewhere in your portfolio.

right? So IT feels like, I mean, I actually just appreciate the reminder that we should look a little longer term. I think it's tempting to say, uh, the markets been up this year. There's no opportunity opportunities to be found. But if you actually take that longer term view, there's potentially some opportunities there.

Definitely, if investors have been kind of on autopilot with their portfolios, which, by the way, is a great way to invest, they may find that they have some losses. And I would say the fixed income, this is a little bit unusual. We don't typically see losses in fixed income funds or you know it's been a bay at run for long term fixed income.

So that's a particularly rich, vain. Even for investors who weren't trying to get cute with their portfolios, they may find the opportunity to unlock some losses there. So I would take a look.

So in your view, is there a right way to go about taxi song? I think you kind of mentioned a taking this strategy can have in hand with tAiling your portfolio, you know adJusting kind of rebalancing at the end of the year.

What do you think? Yeah, i'd like the idea of locking IT into your portfolio, maintain strategy. And i'm pretty hands off with respect to how much portfolio maintenance investors should do for me.

You know, whether you're retired or still working and contributing, I think a good one say annual review is plenty for most of us where we're trying some of these activities together, where we are looking for rebalancing, potentially looking for tax loss sale candidates for retirees who are subject to require minimum distributions. You're getting them into the act as well as as well as potentially some charitable giving. And I think IT can be just a cohesive activity. Less is more with respect of portfolio maintenance, but this is a good time here to do IT.

okay. So I went to wrap up. Do you have any kind of final thoughts as people are heading into the end of the year considering taxi selling, considering this portfolio mainers final?

That's generally speaking, this is a great bar market strategy. So in a twenty, twenty two type environment where almost everything was downward s you name IT, this is really a great time to kind of find a silver lining in a difficult market. In markets like this, I think it'll be a little bit less fruitful in terms of the benefits of tax loss selling.

Um but look alive, I would say you know we will have other bare markets and that pretends to be the particularly valuable time to consider texas selling. All right. Well.

thank you so much. Christine been a good conversation. Thanks for coming to the table.

Thank you so much. markets.

That wraps up this week. explode. Thanks for listening. We're taking a break next week, so tune back in on member six. If you enjoy hearing market trans and analyst insights on our podcast, feel free to leave a five star review on apple podcast. IT will help others find us, thanks to senior video producer jake van curson and associate multi media editor just for bel I mark gals, content development editor at morning star.

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