Tax harvesting is a strategy that can be employed to lower a client’s overall tax liability at the end of the year. In a diversified portfolio of stocks, at any given point in time, there will normally be holdings with capital gains and some with capital losses. When tax harvesting, portfolio managers can sell some of the holdings that are down, potentially later repurchasing them once the tax loss has been realized. At the end of the year, if there are gains in the portfolio, a portion or all of those gains could be offset by the losses that were “harvested” earlier in the year.
This process of minimizing capital gains tax liability is done through the selective realization of these gains and losses in a portfolio. A client and his/her tax advisor can direct the manager to sell securities that have dropped in value to use the capital losses to offset the realized gains. Or to realize gains to offset losses from other investments. The client may be even able to realize a capital loss to offset some of their ordinary income tax liability. The goal of tax management is to control the timing and amount of tax liabilities to increase after-tax returns. A managed account enables you to administer your investments to reflect your personal tax preferences.
To learn more about the kinds of separately-managed accounts that can offer these kinds of features, consult a Trilogy Advisor.