Tax-loss harvesting can be a great way to reduce your tax bill, but there are some common mistakes investors should avoid:

1. Violating the Wash Sale Rule

  • The wash sale rule prohibits buying a “substantially identical” security within 30 days before or after selling it for a loss.
  • This includes buying the stock back in taxable, IRA, or spouse’s account.
  • To avoid this, wait 31 days or reinvest in a different but similar security (e.g., an ETF in the same sector).

2. Forgetting About Mutual Fund and ETF Distributions

  • Mutual funds and ETFs may distribute capital gains in December.
  • If you buy before the ex-dividend date, you could owe taxes on gains from shares you didn’t benefit from.

3. Triggering Short-Term Capital Gains

  • Selling securities held for less than a year can trigger short-term capital gains, which are taxed at higher ordinary income tax rates.
  • If possible, prioritize selling long-term holdings for a more favorable tax rate.

4. Overlooking Carryforward Rules

  • If losses exceed the $3,000 annual limit (or $1,500 for married filing separately), the excess can be carried forward indefinitely.
  • Many investors forget to apply past losses to future gains.

5. Harvesting Losses in Tax-Advantaged Accounts

  • Selling at a loss in IRAs or 401(k)s provides no tax benefit because gains and losses don’t impact your taxable income.

6. Selling Quality Investments for a Tax Benefit

  • Don’t sell an investment just for a tax loss if it still has strong long-term growth potential.
  • Consider reinvesting in a similar but not identical security to stay in the market.

7. Not Factoring in Transaction Costs

  • Frequent buying and selling can lead to trading fees, which can eat into tax savings.
  • Some investors forget to account for commissions or bid-ask spreads when making trades.

8. Ignoring State Tax Implications

  • Some states have different tax treatment for capital gains and losses.
  • Not all states allow capital loss carryforwards or have the same $3,000 offset rule.

Would you like help evaluating your portfolio for tax-loss harvesting opportunities?

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