Newsletter: How Smart Investors Profit from Tax Loss Harvesting

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Welcome to the FI Mastery Journey, a weekly newsletter where you receive actionable ideas from me to help tame financial chaos, get your financial house in order and live your legacy.

Here’s how it works: each week, you’ll receive one article written by me. You’ll also get three simple questions that go along with the week’s article to help jog your mind and inspire you to take small, bite-sized financial wellness actions.

And, you’ll also get an inside look at the research I’m reading.

Follow along for one year and you will have completed all the work necessary to keep your financial house in order.

My goal in all of this work?

To provide you with the tools, resources, and insights to help you take one step closer to becoming the master of your own financial independence journey.

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This Week at a Glance

  • As we approach the end of the year, now is a great time to review your portfolio to profit from tax losses. More on that below.
  • The US just narrowly avoided a government shutdown, but we’re not out of the woods yet. Check out the Analyst’s Corner (here) for a cool chart on market returns and personally curated research on what a shutdown might mean to the markets and your portfolio.
  • ICYMI – be sure to check out last week’s post on managing your new money like old money. The big takeaway: there are specific steps to take if you want to wealth to last beyond your grandchildren.

How Smart Investors Profit from Tax Loss Harvesting

It’s that time of the year again, and apple picking and pumpkin patches not only usher in traditional fall routines, they also signal that it’s time for an annual review of potential tax losses you can harvest from your investment portfolio.

And you know, just as farmers come together to bring in the fall harvest before winter kicks in, prudent investors should take the time to review their portfolios for opportunities to harvest tax losses this season.

Now, for some of you out there, the idea of “harvesting” losses might seem counterintuitive.

That’s because when we think of harvests, we tend to think of taking gains, not losses, right?

Well, while this point may be relevant in most situations, the truth is that a harvest can also happen when you act to avoid leaving money on the table.

Indeed, the key to growing and preserving your wealth isn’t just about how much you make, it’s also how much you keep.

That’s why, just as farmers harvest their crops to reap the benefits of their sewing efforts, investors “harvest” losses to minimize tax expenses.

And so, by realizing (or “harvesting”) losses, you can offset taxable gains elsewhere in your portfolio and avoid paying Uncle Sam any more than his fair share.

With that said, this process isn’t just about selling all your losses. Indeed, it involves making sure that you’re harvesting losses in the right accounts, being methodical in your approach, and avoiding common and costly pitfalls that could derail all of your tax-savings efforts.

How to Profit from Tax Losses

The act of harvesting losses to minimize taxes can get complicated rather quickly. So then, here are three things you may want to consider to avoid analysis paralysis during open enrollment:

Step #1 Embrace the Benefits of Harvesting Losses

View tax loss harvesting as an essential tool in your investment toolbox to proactively manage taxes and optimize investment outcomes.

Ask yourself: When was the last time I reviewed my portfolio to identify opportunities for harvesting losses this year?

Remember, by leveraging downturns in the market and strategically realizing losses, you can offset capital gains and possibly reduce taxable income, allowing you to retain more of your wealth.

Step #2 Strategically Reinvest After Realizing Losses

Once you’ve harvested your losses, prioritize reallocating your capital based on current market conditions and your long-term financial goals.

Ask yourself: Which investment opportunities align with my financial goals and current market conditions?

Reinvesting capital after tax loss harvesting not only allows for potential future gains but also aligns your portfolio with current market conditions, reinforcing your financial strategy and ensuring your investments are continuously working for you.

Step #3 Understand and Navigate the Wash Sale Rule Effectively

Finally, you’ll want to familiarize yourself with the wash-sale rule, which restricts repurchasing the same or “substantially identical” stock within a 30-day window of selling at a loss.

Ask yourself: Do I own company stock or securities in my portfolio that could trigger the wash-sale rule, and do I have a strategy to avoid this pitfall?

By avoiding inadvertent wash sales, you ensure the effectiveness of your tax loss harvesting strategy and maintain the intended tax benefits, allowing for a more optimized and compliant financial approach.

You can learn more by reading this week’s article in full here.

What I’m Reading

We’re all busy in the daily rush of things. That’s why I’m sharing a list of articles that I’ve read this week to help me stay on top of my own financial independence journey.

You can find links to these articles in the daily feed at https://app.fimastery.com

  • Staying the Course During a Shutdown
  • Energy makes time
  • 4 Financial Worries to Cross Off Your List
  • How to be Rich and Anonymous
  • Optimizing for Joy

Thanks for taking a look,

Peter Donisanu