10 Nov

Taking Losses in Your Portfolio for Tax Benefit Purposes

Grant Blindbury

Grant Blindbury

Grant Blindbury has been working in the Investment Advisory industry since 2003 managing assets of affluent individuals and pension plans. Grant earned his bachelor's degree in Business & Economics at the University of California at Los Angeles (UCLA) in 2001. Grant specializes in working with clients approaching or entering retirement and positions them for success by coordinating their most important financial affairs. Grant's goal, as his client’s personal CFO, is to deliver both the financial outcome and experience necessary to accomplish their most important goals. In 2007, Grant earned the professional credential CERTIFIED FINANCIAL PLANNER™ (CFP®). He is president of his local Estate Planning Council and participates in multiple professional learning groups. He is on the Board of Directors for Big Brothers Big Sisters of Ventura County as well as being a “Big” himself. From the outset he was drawn to the client-centric model that fee-based advisory services provided and joined forces with Fields Financial Associates, Inc. He would later partner with the founders of Fields Financial Associates to form FMB Wealth Management. He has been a licensed Investment Advisor since 2003.
Grant Blindbury

Let’s face it, none of us ever go into an investment thinking it will not work out, but this does occur and can end up resulting in a loss.  In these cases, we can use these losses to our advantage for tax planning purposes. Tax-loss harvesting is a powerful tool you can employ to convert losses into tax savings without diverting drastically from your long-term investment strategy or outcome.

Here’s how the strategy works:

First, make sure to consult with your financial advisor or accountant before making any decision based on what you learn here. Tax harvesting can be complex and change over time as tax laws change. Your financial professionals will have the best insight into current laws and practices.

Currently, investors can use unlimited losses to offset capital gains, but only claim up to $3,000 per year in losses against normal income.  However, any unused losses can be carried forward to use in future year.  For example, if you have a $9,000 loss, you can take a $3,000 deduction each year for three years. It’s important to understand that you won’t get the full $9,000 loss claim in one year unless you also have $9,000 in gains. Knowing this can help you offset other gains and income.

Doing this correctly is a 3-step process to ensure you are correctly following IRS guidelines:

  1. Sell your shares for a loss.
  2. Reinvest in a similar, but not identical position.
  3. Reinvest in the original position at least 31 days later.

This is a powerful strategy to help you reduce your effective tax rate and increase your net worth. When used properly, tax harvesting can make significant improvements to your investment portfolio over long periods of time.  This works particularly well with index or passive mutual funds.  You can sell a fund that is linked to an specific index and at the same time buy another funds that is linked to a similar but not identical index.

However, there are some instances when it doesn’t make sense to implement this strategy:

  • If you plan on waiting 31 days to repurchase the original investment, it can be dangerous to utilize this strategy because of the dramatic market ups and downs that are present in these types of markets. It can be hard to time the trade exactly right and you may find that your loss turned back to break even in only one week’s time.  
  • Another poor implementation of this strategy is to use it when the trading costs don’t outweigh the tax savings. Remember that there are at least four trades involved here, each with a commission or a fee. When the tax savings will be minimal or equal to the total combined trading fees, it just doesn’t make sense to follow this model.
  • This strategy only works in your personal investment accounts and cannot be used in any retirement accounts such as a 401(k), IRA or Roth IRA.


Taking a loss is never in the initial purchase plan and none of us like being in a investment that is currently down.  However, knowing that there is a tax strategy that can help you save money on your taxes is very helpful to  continue steady growth and remain secure in your wealth management strategy into the future. If you are concerned about losses in your portfolio, contact your financial advisor to determine if tax-loss harvesting is an option for you.

Share this