The U.S. stock market boasted impressive gains exceeding 25% year-to-date through mid-December 2024. While this robust performance suggests a healthy financial landscape, it might mask potential tax-loss harvesting opportunities within a diversified portfolio. Beyond the thriving U.S. market, other segments have experienced less stellar returns, presenting savvy investors with chances to offset gains and minimize tax liabilities.
Table Content:
Understanding Tax-Loss Harvesting Basics
Tax-loss harvesting involves strategically selling investments that have incurred losses in taxable accounts to offset capital gains realized elsewhere. This strategy becomes particularly relevant when considering the potential for substantial capital gains distributions from mutual funds in 2024. Crucially, this strategy only applies to taxable accounts; tax-advantaged accounts like 401(k)s and IRAs are exempt.
To effectively utilize tax-loss harvesting, identify holdings currently trading below their cost basis. The cost basis represents the original purchase price plus any commissions and reinvested dividends or capital gains. Various methods exist for calculating cost basis, including specific share identification, average cost, and first-in, first-out (FIFO). Understanding the default method applied by your investment firm is essential for accurate loss or gain reporting.
Capital losses generated from selling securities below their cost basis can be used to offset capital gains. If losses surpass gains, you can offset up to $3,000 in ordinary income, with any remaining losses carried forward indefinitely to offset future gains.
Potential Tax-Loss Harvesting Candidates for 2024
As 2024 draws to a close, certain asset classes stand out as potential candidates for tax-loss harvesting:
Long-Term Bond Funds and ETFs
Despite the Federal Reserve’s interest rate cuts, many bond funds, especially those focused on long-term maturities, remain in negative territory over the past one- and three-year periods. This presents a compelling opportunity for tax-loss selling. While losses in intermediate-term bond funds have been less severe (around 2% annualized over three years), significant positions could still yield substantial losses.
Furthermore, tax-loss selling in the bond market allows for strategic asset location adjustments. Fixed-income investments are generally more tax-efficient within tax-sheltered accounts. With rising yields, optimizing asset placement becomes increasingly crucial for maximizing after-tax returns. Moving fixed income to tax advantaged accounts and potentially replacing them with growth oriented equities in taxable accounts can create tax alpha.
Conclusion: Strategic Tax Management in a Dynamic Market
While the buoyant U.S. stock market might overshadow potential tax advantages, exploring opportunities within other asset classes, such as long-term bond funds, can yield significant tax savings. Leveraging tax-loss harvesting strategically allows investors to offset gains, minimize tax burdens, and optimize portfolio positioning for long-term success. Consult with a financial advisor to determine the most suitable tax-loss harvesting strategy for your individual circumstances.
