How to Use Tax Loss Harvesting to Reduce Client Taxes

What is Tax Loss Harvesting?

Tax loss harvesting (TLH) is simply a strategy where the current losses in client positions are realized by selling the securities to reduce the capital gain taxes for clients.  In order to maintain the client’s investment strategy, those securities are often replaced by purchasing an equivalent holding.

Important Things to Consider If You Use Tax Loss Harvesting

Wash Sales

Although the IRS does allow tax loss harvesting it is important to ensure that the wash sale rule is not violated by selling a security at a loss and then purchasing the same or “substantially identical” stock or option within 30 days of the purchase.

Net Gains/Losses

Long term and short term gains and losses are taxed at different rates which affect the total capital gains tax.  If you want to best optimize a client’s tax bill an advisor should consider the short term and long term gains realized in the current tax year in addition to the transaction costs and overall tax situation of each client.  In some cases, it may be beneficial to harvest tax gains instead of losses. Because each client has a unique tax situation, fully automated robo-advisor tax harvesting solutions may not be appropriate for every client.

Custodian Tax Accounting

If you are using one of the default accounting methods at the custodians such as First in First Out (FIFO) or LIFO it may not be as easy to benefit from tax loss harvesting.  For example, if a client has three different purchases for a stock and the second tax lot has the only loss then it may be best to only sell the middle tax lot.  Most custodians do have a Tax Optimized accounting method which will not only sell losses first but will also consider the tax lot holding period for short and long term gains/losses.  There are IRS rules related to changing this accounting method so it is best to consult a tax specialist.

Tax Loss Harvesting with Blaze Portfolio

ATOM Align, Blaze Portfolio’s rebalancing and trading platform, combines powerful and flexible ways to identify tax harvesting opportunities with automated trade creation and security equivalents.  Advisors will benefit from these powerful features:

  • Intelligent gain loss searches identify optimal tax harvesting opportunities
  • Seamlessly create TLH trades across multiple securities and accounts in a single step
  • Security equivalent rules automate the purchase of replacement holdings
  • Automatic wash sale prevention
  • Saved tax harvesting searches that can be shared across multiple users

For more detailed description of the Tax Harvesting features in ATOM Align visit this article in our support site.

Request a demo to preview how Tax Loss Harvesting with Blaze Portfolio can streamline your process and improve after-tax performance.

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