Definition:
Tax-loss harvesting is a strategy that involves selling securities at a loss to offset capital gains, thereby reducing your overall tax liability.
WHEN AND WHY IT’S USED:
Tax-loss harvesting is used during periods of market volatility when some investments have decreased in value. By strategically selling these underperforming assets, you can realize losses that help offset the gains from other investments, reducing your taxable income. This practice is often implemented toward the end of the tax year as part of a comprehensive tax strategy.
IMPORTANCE IN COMMUNICATION:
Clear communication about tax-loss harvesting with your advisor ensures that you understand how it fits into your broader tax strategy. It enables you to assess the potential benefits of realizing losses to offset gains, which can lead to significant tax savings. This dialogue helps you grasp the trade-offs involved in selling investments at a loss and how it may impact your overall portfolio performance.
Additionally, discussing tax-loss harvesting provides an opportunity to review your portfolio’s performance and identify areas for improvement in tax management. This transparent conversation ensures that your investment strategy is aligned with both your growth objectives and your tax planning needs, ultimately supporting a more efficient financial plan.
EXAMPLES IN CONVERSATION:
“How can tax-loss harvesting help reduce my capital gains tax this year?”
“What adjustments should we consider in my portfolio to take advantage of tax-loss harvesting opportunities?”