Tax loss harvesting (TLH) is a powerful tool that can help enhance portfolio returns by strategically using investment losses to offset gains. For financial advisors and investors using direct indexing strategies, knowing how to tax loss harvest regularly can make a significant difference in achieving better after-tax performance. In this article, we'll explore how to tax loss harvest effectively, its benefits, and why it plays a crucial role in direct indexing strategies.
Understanding How To Tax Loss Harvest
Before diving into the details of how to tax loss harvest, it’s essential to understand the basics of this strategy. Tax loss harvesting is the practice of selling investments at a loss to offset taxable gains elsewhere in your portfolio. By doing this, investors can reduce their overall tax liability, thereby keeping more of their money invested and working toward long-term financial goals.
When you know how to tax loss harvest properly, you can utilize market fluctuations to your advantage. This strategy is especially beneficial when combined with direct indexing, where individual securities can be sold to capture losses while still maintaining the overall market exposure.
The Power of Regular and Automated Tax Loss Harvesting
One of the most important aspects of learning how to tax loss harvest effectively is understanding the value of doing it regularly. Many investors mistakenly believe that tax loss harvesting is only useful at the end of the year. However, regular, year-round harvesting can offer even greater benefits.
When you proactively harvest losses throughout the year, you can take advantage of market dips as they occur, locking in tax savings whenever opportunities arise. This approach ensures that you are maximizing the potential to reduce taxable income on an ongoing basis, rather than waiting for a single chance at year’s end.
Automation plays a key role in the process as well. Offerings like Orion Custom Indexing make it easier for financial advisors by automating the loss harvesting process, ensuring that opportunities for tax savings are captured consistently without the need for their constant manual intervention.