I've been reading about tax loss harvesting as part of tax efficient investing strategies. For someone with a moderate sized investment portfolio (around $100k), does this actually make a meaningful difference? Or is it one of those tax saving techniques that sounds better in theory than in practice? Looking for personal finance tax tips from people who've actually done this.
Tax loss harvesting can definitely be worth it, especially in volatile markets. The basic idea is you sell investments that are down to realize the loss, then buy similar but not identical investments to maintain your portfolio allocation. The loss offsets capital gains, and up to $3,000 can offset ordinary income each year.
For a $100k portfolio, it might save you a few hundred dollars per year depending on market conditions. The key is to avoid wash sales - you can't buy substantially identical securities 30 days before or after selling at a loss. Some robo-advisors automate this as part of their tax efficient investing services.
I've done it manually for years. It's not that complicated once you understand the rules. The main benefit is it lets you take losses when they happen and use them to offset gains you might have elsewhere in your portfolio. Unused losses carry forward indefinitely, so they can help in future years too.
One thing to consider is whether the tax savings outweigh the trading costs and effort. For a $100k portfolio, if you save $300 in taxes but pay $50 in trading fees and spend several hours managing it, is it worth it? For larger portfolios or during big market downturns, the savings can be more significant.
I use Betterment for my investments and they do automatic tax loss harvesting. For my $150k portfolio, they harvested about $2,800 in losses last year, which saved me around $700 in taxes. The service fee is 0.25%, so for me it's worth it. But if you're comfortable doing it manually, you can save the fee.
Don't forget about the opportunity to reset your cost basis. If you sell a losing investment and buy something similar, you establish a new, lower cost basis. Then when it recovers, you'll pay less in capital gains taxes when you eventually sell. That's part of the long-term benefit of tax loss harvesting beyond just the immediate deduction.