5 Step Strategy For Tax-Loss Harvesting

Zachary T. Lauzon
Wednesday, December 2nd, 2020
Posted in: Financial Planning, Income Source, Retirement Security
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Our Team Reveals A Proven 5 Step Process To Minimize Your Year-End Taxes

By Zachary T. Lauzon


Benjamin Franklin once said, “In this world, nothing can be said to be certain except for death and taxes.” Today, perhaps more than ever before, the saying still holds true.

For many investors, taxes are a nuisance to avoid. But at the end of the day – or in this case, the year – they know they’ll ultimately have to settle up. For most of us, taxes are complicated and costly, and they have the potential to act as a drag on our investments.

That’s why the impulse to avoid paying taxes on investment accounts is so strong. And with year-end fast approaching, there’s no better time for individual and institutional investors to consider the use of tax minimization strategies like Tax-Loss Harvesting.

In this blog post, we’ll review a series of tried-and-true tax-loss harvesting strategies that can help you to minimize – even avoid – your tax burden.

Step 1: Collaboration

Tax-loss harvesting isn’t simple – and it’s not a strategy to tackle without experienced guidance. We recommend partnering with a trusted CPA and Financial Advisor to help ease this burden and lead to the most favorable outcome possible

Step 2: Analysis

The analysis of your taxable investment accounts should always include – but not be limited to – Realized/unrealized gain-loss reporting with cost-basis information, dividends and other investment income, and available loss-carryforward.

Realized Gain/Loss Report: This report helps to determine the amount of realized gain or loss in your account(s) for each position.

Unrealized Gain/Loss Report (AKA paper gains/losses) : Reveals the gain or loss for each position that has NOT yet been realized.

Dividends & Other Investment Income: Reports other sources of income from your account(s), such as dividends and interest.

Loss Carryforward: Establishes the amount of current taxable loss you’re able to carryforward to offset future taxable income indefinitely until exhausted. Keep in mind, net capital losses can only be deducted up to $3,000 in a taxable year.

Step 3: Outlook

Since you can’t rely on a crystal ball to predict future changes in the tax code, it’s wise to take a step back, to take a look at your future, and to ask yourself what might happen in the coming year that might affect your tax situation. Common examples include the sale of a business or real estate, expiring stock options, and other moves that may have tax implications. By working with what you know, you’ll be better positioned to compare current and coming year.

From there, develop a plan around the amount of tax-loss harvesting to be accomplished this year – or the amount of gain you can withstand without hurting your tax situation or disturbing the asset allocation of your investment portfolio – which leads us to our next important step…

Step 4: Strategy

Perhaps one of the most important and complex steps in the process, portfolio strategy should be a primary consideration well before decisions are made. Finding capital loss opportunities within one’s portfolio to offset capital gains while maintaining the appropriate investment mix can be a fine line to walk. Be sure to ask yourself:

  • Why did I buy this position originally?
  • Do I plan on purchasing this position (or another similar alternative) again in the future?
  • Are there capital losses in my portfolio to offset realized capital gains?
  • What are my cash flow needs over the coming 3, 6, 12 months?
  • Will these transactions move me further away from my model allocation?

A thoughtful, measured approach to year-end tax planning can be a boon to investor returns.

Step 5: Execution

You’re on the home stretch! Put your well-thought-out plan into action and start executing the trades by the end of the year. Advanced strategies such as covered call option writing, short selling, and investing in various alternatives can help minimize the impact on your portfolio asset allocation. Be careful to avoid the wash sale rule, or all your clever tax planning will have been for nothing.

If you’re thinking about taking a more proactive approach to your year-end tax planning, be sure to follow these 5 simple steps: Collaboration, Analysis, Outlook, Strategy, and Execution to minimize taxes and maximize returns.


Would you like to learn more about Retirement Security and how to plan and strategize to minimize year-end taxes? Connect with a Richard Brothers financial professional located in South Portland, ME today to discover how you can secure your future with wise financial moves.