Is Tax Loss Harvesting Worth It?

Tax loss harvesting is a sophisticated yet accessible strategy for optimizing investment returns. But is it truly worth the effort? Let's take a quick look at the intricacies of tax loss harvesting — how it works, its benefits, and whether it deserves a place in your investment strategy.

Understanding Tax Loss Harvesting

Tax loss harvesting is a strategy where investors sell underperforming investments at a loss to offset taxable capital gains from other investments. This process can also potentially offset a portion of ordinary income. By reducing the overall tax liability, investors can enhance their after-tax returns, effectively turning a loss into a strategic advantage.

Here's a simplified example:

1. Sell an underperforming asset: Suppose you have a stock that has decreased in value since purchase. By selling it, you realize a capital loss.
2. Offset gains: This loss can then be used to offset capital gains from other investments, thereby reducing your taxable income.
3. Reinvest: Typically, you reinvest the proceeds into another investment. To avoid a "wash sale" (which would negate the tax benefits), you must wait 30 days before repurchasing the same or a substantially identical security.

Why Avoiding Wash Sales is Crucial

A wash sale occurs if you buy the same or a substantially identical security within 30 days before or after selling it at a loss. The wash sale rule prevents investors from claiming tax benefits without truly altering their investment position. Ensuring compliance with the wash sale rule is essential for the effectiveness of tax loss harvesting.

The Benefits of Tax Loss Harvesting

1. Enhanced After-Tax Returns: According to a study covering the period from 1926 to 2018, tax loss harvesting produced an average annual tax alpha of 1.10%.¹ Over a typical investor's lifetime, this could equate to approximately 11 additional years of retirement distributions.
2. Portfolio Improvement: Regular tax loss harvesting can keep a portfolio on track to achieve its goals by maximizing after-tax gains. It helps in maintaining the portfolio's target risk and return profile.
3. Client Satisfaction: For financial advisors, tax loss harvesting is not just a tax strategy but a value-add service that enhances client satisfaction and loyalty. It demonstrates proactive management and personalized attention to clients' tax situations.

Is Tax Loss Harvesting Worth It?

Considering the potential to enhance after-tax returns significantly, tax loss harvesting is a compelling strategy. Here are a few reasons why you might find Orion Custom Indexing worth implementing:

• Customization and Personalization: Modern investment platforms, like Orion Custom Indexing, have made tax loss harvesting more accessible than ever. Our technology helps advisors offer bespoke portfolio management that aligns with their clients’ unique financial situations and goals.
• Technological Advancements: Our solution automatically scans for tax loss harvesting opportunities, helping ensure timely execution and maximizing tax benefits. This level of precision was previously only available to high-net-worth individuals or through complex and costly manual processes.
• Scalability for Advisors: For financial advisors, offering tax loss harvesting can be a differentiator. It not only helps in retaining clients but also attracts new ones by showcasing an ability to manage portfolios in a tax-efficient manner.

Tax loss harvesting is a powerful tool in the arsenal of both individual investors and financial advisors. When executed correctly, it can lead to substantial tax savings and improved portfolio performance. With the ease of implementation offered by Orion Custom Indexing making this strategy highly  accessible, the question isn’t so much "Is tax loss harvesting worth it?" but rather "Why wouldn’t you incorporate it into your investment strategy?"

Whether you're an investor looking to optimize your returns or a financial advisor aiming to provide added value, tax loss harvesting offers significant benefits that can help you achieve your financial goals more efficiently.