The coronavirus is not only a serious health scare, it is also a serious financial crisis. Businesses are being forced to shut down and people are losing their income. The stock markets are reacting negatively as expected. While taking losses in our equity portfolio is never a good thing, it does present an opportunity to reduce taxes this year and into the future.
The process is called “tax-loss harvesting”. To explain how it works, I should start by defining a few terms:
During periods when the investment markets are losing value, we use this opportunity to look at all our client’s portfolios to find assets that we can sell at a loss. However, for reasons I’ve stated in previous articles, we don’t want to be out of the market. It is important to stay invested during turbulent times to capture the up days. So, rather than just sell to realize a tax-loss, we immediately buy a similar investment. That way we are able to help our clients reduce their future taxes, stay invested in the markets and avoid the wash rule.
It can be hard to find the “silver lining” when our investments are losing value and sometimes that lining doesn’t shine brightly. However, by looking for tax losses to harvest and doing that correctly, we can use this opportunity to ease future tax burdens.