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Video: How Can Tax Loss Harvesting Help?

We explain exactly how tax loss harvesting works, and why it can be a powerful tool during times of market volatility.

Articles by Dan Egan
By Dan Egan Managing Director of Behavioral Finance & Investing, Betterment Published May. 06, 2020
Published May. 06, 2020
3 min read

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Transcript

“Hey everyone. Dan Egan from the Advice and Investing Team at Betterment here. One of the most common questions we get during downturns is actually, why am I not tax loss harvesting more?

It’s one of the services we offer, you pay us for it, so it’s fair enough to say like, hey, is this thing on? Is there any way I can get it to work better?

I’m going to talk a little bit about how TLH+ works and how you can optimize using it on your accounts with some of the settings that you actually control.

Number one. This sounds silly, but it happens. Check that you’ve activated it. We don’t necessarily turn it on by default in case there’s something in your circumstances that would make it a bad fit, so do check that it’s actually on.

Number two. Check if you actually have losses in your taxable account. You can do this by navigating to the Documents tab on the left rail, if you go to the bottom left side of the screen it will be there. Then, click on taxes, then click on cost basis, then cost basis report for your taxable account. Once you have that, it will be a CSV or an Excel file, click and sort by the column of $ gains or losses.

You’d be surprised how often people end up not actually having very large losses in any of their securities. Either they’ve already tax loss harvested them at some point, or they haven’t invested recently such that they invested before the market went down, and they don’t have any lots at a loss.

This tells you the size of any of your harvestable losses, take a look at that.

If you do have harvestable losses in there, we’re going to go to the next step, step three, that involves wash sales. Wash sales are part of the tax regulations that try to prevent you from taking advantage of if you bought and sold the exact same security. If you buy the same security you’re attempting to tax loss harvest, 30 days before or 30 days after, the IRS is going to say, wait, you basically just traded in and out of the same thing. That loss doesn’t count. You were able to maintain your exposure.

In taxable accounts, these wash sales just reset the basis lower. They just wash out the loss. They are a little bit of friction and they reduce the benefits to any given harvest. On the other hand, and this is trickier, a wash sale from an IRA is actually permanently disallowing the loss. That means that your cost basis gets set lower, which means you’ll have higher future taxes, and you don’t any benefit from it on your tax return this year.

Our system strongly tries to avoid any IRA wash sales for this reason. This means that if you have frequent deposits into your IRA, say monthly or every 2 weeks or so, this will likely block TLH+ because we don’t have any opportunities to go in and do it without causing an IRA wash sale.

One of the things that I do, I actually have a consistent savings schedule, into a different goal, either a cash savings goal, or something like that, and then every year, right when I’m filing my taxes, I do a one-time large deposit into my IRAs, rather than dripping it in monthly. It’s a way to make sure that tax loss harvesting is working well, and I’m maximizing my time in the market in my IRAs.

Thanks very much, if you have any questions feel free to talk to us on our social media channels. Thank you.”

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