The Benefits and Methods of Harvesting Your Losses, and Not Just at Year-end

Abstract

The evidence is quite strong that systematic loss harvesting is one of the most important elements of the tax-efficient portfolio management process. In this article, the authors address the rules, pitfalls, and methods investors may utilize in realizing losses in their portfolios. They first observe that the simplest way to harvest losses when a portfolio has both unrealized winners and losers is to harvest them together. But portfolios with paper losses do not always have paper gains that neatly offset them, and often investors still have faith in a holding that is under water. The article investigates how investors can “have it both ways,” i.e., recognize the loss for tax purposes but keep the holding, and proposes four possible transactions, in addition to the two traditional methods employed by investors and often recommended by brokerage houses, which do necessitate a change in the payoff pattern.