Even in a bull market, certain investments within a diversified portfolio are likely to post losses. The good news, though, is that these losses can be put to good use through a process known as tax-loss harvesting.
In a nutshell, tax-loss harvesting enables you to offset the capital gains taxes that you’ve incurred on your successful investments. It’s a service that we at Align Wealth Management provide automatically for our clients’ taxable investment accounts.
Here’s an illustration of how tax-loss harvesting works. Suppose Investment A has a realized gain of $1,000, while Investment B has a loss of $1,000. By selling Investment B, we realize a loss that will neutralize the $1,000 capital gain for tax purposes.