What Is Tax-Loss Harvesting? It’s a Way To Create a Tax Asset.

Executive summary:

  • Investment gains in a portfolio create value. But you can also create value by creating tax assets that help minimize the amount of taxes paid.
  • Tax-loss harvesting is an essential tax-management strategy that can benefit a broad range of taxable investors – even those who many not think they have to worry about investment taxes.
  • Advisors conducting tax-loss harvesting on their own should be wary of potential pitfalls and may wish to seek expertise to ensure their clients are in the right solutions to maximize their after-tax wealth.

There are a number of ways to create value when investing. The main way most investors think about creating value is through purchasing an asset like a stock whose price rises. That price increase equals a profit and therefore has created value.
But…. How does this work in a taxable portfolio? Profits are taxed. The profit that was created is therefore Pre-tax Value. After-tax, the profit is going to be lower; and in many cases it can be a lot lower. What can be done about that, if anything? There is another type of value than can be created within an investment portfolio: a Tax Asset. What is a Tax Asset, what is it good for, and how can you create it, you might wonder?

A Tax Asset is a type of credit that can be used to lower, and in some cases, eliminate, the tax liability associated with a profit. Now we are getting into creating After-Tax Value!

And how do you create this Tax Asset? You do it through tax-loss harvesting.