Happy Tax Day: Is Tax-Loss Harvesting Worth It? - InvestingChannel

Happy Tax Day: Is Tax-Loss Harvesting Worth It?

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Happy Tax Day: Is Tax-Loss Harvesting Worth It?

Don’t look now, but YTD, Tesla (TSLA) is down roughly 31%. Maybe you bought it at the end of last year as a Christmas present to yourself. Now, you’re looking at on-paper losses or you took the hit and sold for a loss. 

In both cases, you might be able to ease some of the pain come tax time. 

Look now! But today is Tax Day for most of us. The day the Internal Revenue Service (IRS) wants to see your tax return for 2023. You might not be able to deal with that 2024 TSLA (or some other) loss now. But you probably can at this time next year when you’re finishing up your 2024 taxes. Or, maybe even before then! 

At the end of last year, we made a timely post: What Is Tax-Loss Harvesting? 

In that Juice, we detail exactly what tax-loss harvesting is. It’s a strategy by which you sell losing stocks to realize the capital loss and/or offset the gains you realized by selling winning stocks:

You’re not a fan of taking the tax hit, particularly at your income tax rate, so you decide to employ tax loss harvesting to help offset this taxable gain. 

Here’s how it works. 

You could sell one or more of your losers and use the capital losses to offset up to $3,000 of your ordinary taxable income …

If you exceed $3,000, you can carry over the excess amounts to offset income in future years.

Complete details in that 2023 article, but today we want to look at some data from a robo advisor that provides tax-loss harvesting to its clients. While you can execute this strategy on your own, many robo advisors offer it for free, with a minimum balance or for a fee. 

Don’t know what a robo advisor is? We covered that as well in What Is A Robo Advisor? and How And Where Robo Advisors Invest Your Money

Stick with The Juice. We’re building quite the personal finance and investing library!

Anyhow, one of the robo-advisory pioneers, Wealthfront, just put out a report detailing the breadth and impact of tax-loss harvesting. 

Here are some details:

  • In 2023, Wealthfront claims it “harvested” $256 million in total losses for its clients.
  • Over the last five years, Wealthfront has harvested $2.7 billion in losses. 
  • The firm estimates the tax benefit for its clients in 2023 to be $83.4 million. 
  • Wealthfront ran some numbers and concluded that, for clients in its classic portfolio, the average yearly tax benefit from tax-loss harvesting was 1.63% of their portfolio over the last decade. According to the company, this exponentially offsets its 0.25% annual advisory fee. 

While we’re not here to vouch for Wealthfront specifically, their numbers are convincing. As is something else the company noted in its report:

You might think of tax-loss harvesting as a strategy to use at the end of the year in a last-ditch effort to lower your tax bill, but it’s even more powerful when you look for opportunities to harvest losses all year long like Wealthfront’s software does. Fewer than half of the losses Wealthfront harvested in unmodified Classic and Socially Responsible portfolios in 2023 (41.7%) were harvested in the final quarter of the year, the time of year that many people who manually conduct tax-loss harvesting are inclined to do so (with 22.9% harvested in Q4 over the last 5 years and 29.2% in Q4 over the last decade). In other words, if you waited until the end of the year to manually harvest losses instead of automating it year-round with Wealthfront, you likely missed out.

We’re not ashamed to admit that we tend to think about tax-loss harvesting as a year-end move. But Wealthfront makes a solid point. 

Like keeping on top of estimated taxes throughout the year if you’re self-employed or spreading your IRA contributions out over the entire year, paying attention to your winners and losers in the months not named April can make sense. 

As always, it’s best to consult a tax advisor to determine what makes sense for your specific situation. 

The Bottom Line: So, yeah, Wealthfront makes a good point. Strategies such as tax-loss harvesting should not be viewed as merely tax time moves. 

This is part of what can make a robo advisor — or a really good human financial advisor — valuable. They monitor your portfolio for you and pick the right trades at the right time to help maximize your potential tax savings. You could make the argument that an algorithm can stay on top of this even better than a living, breathing person.

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