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Tax Loss Harvesting: What it Should Really Look Like at Your Wealth Level · The Wealth Cafe

• 0:15
  SPEAKER_00: Welcome back to this episode of the Wealth Cafe.
• 0:17
  SPEAKER_00: I'm Caroline Tannis, lead financial advisor and founder of Tannis Financial Group, and I am very excited to dive in today's topic.
• 0:25
  SPEAKER_00: And I want to start with a concept that feels a little backwards the first time you hear it, but I'm hoping it'll make complete sense to you the second time.
• 0:34
  SPEAKER_00: So bear with me on this one.
• 0:35
  SPEAKER_00: We're going to talk about tax lost harvesting as a strategy for selling investments that have gone down in value in order to offset the taxes you owe on investments that have actually risen significantly in value.
• 0:49
  SPEAKER_00: You are, in a sense, using your loss as currency.
• 0:52
  SPEAKER_00: You are converting them into tax savings that reduce the bill on your gains.
• 0:56
  SPEAKER_00: And October, right now, is when that strategy needs to be on your radar and you need to be working with your financial team to start making these moves in transition.
• 1:05
  SPEAKER_00: And here's why that timing matters.
• 1:07
  SPEAKER_00: We are in one of the most significant capital gains environment in years.
• 1:11
  SPEAKER_00: The SP has surged more than 75% since the beginning of 2023.
• 1:16
  SPEAKER_00: And if you have been invested and you probably have gains, you probably have significant ones at that.
• 1:22
  SPEAKER_00: And the tax bill on those gains is real.
• 1:25
  SPEAKER_00: But in any diversified portfolio, some positions have gone down, even in a broadly rising market.
• 1:31
  SPEAKER_00: Individual sectors, international allocations, certain funds have underperformed.
• 1:37
  SPEAKER_00: And those losses are not just disappointments we have to sit with.
• 1:40
  SPEAKER_00: They're actually a tax asset and one that can directly reduce what we owe to Uncle Sam this year if you harvest them, but it needs to happen before December 31st.
• 1:49
  SPEAKER_00: There is no leeway on this.
• 1:51
  SPEAKER_00: Today's episode is the complete guide to tax loss harvesting at your wealth level, not just the basic version.
• 1:58
  SPEAKER_00: The version that actually applies when you have complex multi-account portfolios and probably significant taxable gains to manage.
• 2:06
  SPEAKER_00: Let me walk you through the mechanics from the beginning because I want to make sure we're building a complete foundation here and we're all coming from a different education background.
• 2:15
  SPEAKER_00: When you sell an investment for more than you paid for it, you realize a capital gain.
• 2:19
  SPEAKER_00: That gain is then taxable.
• 2:20
  SPEAKER_00: For long-term capital gains on assets held on more than one year, these are going to be taxed at preferential rates.
• 2:27
  SPEAKER_00: So either zero, 15%, or 20% federally, depending on your income.
• 2:31
  SPEAKER_00: You're then going to have to add in 3.8% net investment income tax for our high earners.
• 2:36
  SPEAKER_00: And the combined federal rate can reach up to 23.8%.
• 2:41
  SPEAKER_00: When you sell an investment, however, for less than you paid for it, you realize a capital loss, which can offset capital gains dollar for dollar.
• 2:49
  SPEAKER_00: If you have$200,000 in realized capital gains and an$80,000 in realized losses, your net taxable gain will be$120,000 instead of$200,000.
• 3:00
  SPEAKER_00: And at$23.8 on per combined rate, that's$80,000 if you harvested losses.
• 3:06
  SPEAKER_00: That's going to save you$19,000 in federal taxes alone.
• 3:09
  SPEAKER_00: If your losses exceed your gains, you can deduct up to$3,000 of the excess losses against ordinary income in the current year.
• 3:18
  SPEAKER_00: Anything beyond that is going to carry forward, though, to future tax years indefinitely, and it can be used to offset gains in those years.
• 3:26
  SPEAKER_00: But you do need to know about the wash sale rule.
• 3:28
  SPEAKER_00: This is a critical rule you must follow.
• 3:30
  SPEAKER_00: If you're going to sell an investment at a loss, repurchase it, or a substantially identical subsecurity within 30 days before or after the sale, the IRS is going to disallow the loss.
• 3:42
  SPEAKER_00: Now it's not permanently lost, but it's going to defer the benefit, the harvest, and the loss, and you maintain the market exposure, you must buy a similar but not identical security.
• 3:53
  SPEAKER_00: For example, if you're selling a Vanguard SP 500 ETF and replacing with a Schwab S P 500 ETF, that's likely going to violate the wash sale rule because they track the same index.
• 4:04
  SPEAKER_00: But if you replace it with a larger broad cap fund that is not the same index is generally acceptable, your advisor needs to make sure they are managing this carefully alongside.
• 4:15
  SPEAKER_00: Here's where the strategy is going to get a little more sophisticated.
• 4:18
  SPEAKER_00: And for those of you that have more complex pictures, your ears are going to want to perk up.
• 4:23
  SPEAKER_00: And that's a lot of our listeners in this audience.
• 4:27
  SPEAKER_00: Multi-account coordination.
• 4:29
  SPEAKER_00: Now, at your wealth level, you likely have investments spread across multiple account types, whether that's taxable brokerage accounts, traditional IRAs, Roth IRAs, possibly even trust accounts or custodial accounts.
• 4:42
  SPEAKER_00: Tax loss harvesting, to clarify, only applies to taxable accounts.
• 4:46
  SPEAKER_00: You cannot tax loss harvest in an IRA because the gains and losses inside of an IRA do not affect your current tax picture.
• 4:54
  SPEAKER_00: The coordination, however, matters.
• 4:57
  SPEAKER_00: Identifying losses in taxable accounts while ensuring that that wash sale rule is not accidentally violated by the purchase of a similar security in a related IRA account.
• 5:08
  SPEAKER_00: The IRS confirmed in Revenue Ruling 2008-5 that the wash sale rule actually applies across IRAs and taxable accounts when you are the same beneficial owner.
• 5:20
  SPEAKER_00: And your advisor needs to be looking at all of your accounts together, not just one at a time in this situation.
• 5:26
  SPEAKER_00: Even if it's the accounts that they aren't managing, they need to be aware of them.
• 5:30
  SPEAKER_00: Let's talk about long short tax loss harvesting.
• 5:33
  SPEAKER_00: This is actually a more aggressive version that is gaining traction among the high net worth investors in 2026.
• 5:39
  SPEAKER_00: Mitchell Drossman of Bank of America has specifically cited it as one of the strategies wealthy investors are increasingly using.
• 5:47
  SPEAKER_00: In traditional harvesting, you are selling the losing positions and replacing it with similar ones.
• 5:52
  SPEAKER_00: However, in long short harvesting, the strategy borrows against the portfolio to create short positions that are expected to decline while maintaining long positions that are expected to rise, which is actually generating losses to harvest while maintaining market exposure.
• 6:09
  SPEAKER_00: Now, this is a sophisticated advisor-managed strategy, and it is not for everyone, but it does represent a new frontier of where this conversation is going for high net worth portfolios.
• 6:22
  SPEAKER_00: Let's talk about one of my favorites, which is direct indexing.
• 6:24
  SPEAKER_00: If you have a significant taxable portfolio, typically around 250,000 or more, direct indexing is worth understanding.
• 6:32
  SPEAKER_00: Rather than owning an index fund, you actually own the individual stocks that make up that index directly.
• 6:39
  SPEAKER_00: This allows your advisor to harvest losses on individual stocks that are underperforming within the index while you're still maintaining that marketing overall exposure.
• 6:49
  SPEAKER_00: And this loss of generating ability because of direct indexing is substantially higher than just owning a single ETF, because at any given time, some individual stocks within the index will always be down, even when the index as a whole is on the rise.
• 7:04
  SPEAKER_00: Over time, direct indexing can significantly reduce your effective tax drag.
• 7:10
  SPEAKER_00: And at your wealth level, this is a strategy worth having on your radar if you don't already have it in place.
• 7:16
  SPEAKER_00: Let me give you the specific deadlines that make October the action month for this strategy, the settlement deadline.
• 7:23
  SPEAKER_00: Tax loss harvesting trades must settle, not be placed, but settle by December 31st to count in 2026.
• 7:31
  SPEAKER_00: Most securities settle in a business day, T plus one is what we call that, meaning that the trade actually needs to be executed approximately December 29th or 30th, depending on the trading calendar and any holiday closures.
• 7:44
  SPEAKER_00: Now, as a practical matter, December 26th is the last date that I typically encourage executing harvesting trades.
• 7:52
  SPEAKER_00: After that, the holiday schedule and the processing risk create a lot of uncertainty about unsettlement.
• 7:57
  SPEAKER_00: That's just not worth having.
• 7:59
  SPEAKER_00: The second thing to know about is the wash sale window.
• 8:02
  SPEAKER_00: If you sell a security to harvest the loss on December 26th, the wash sale rule prevents you from repurchasing that same security until January 26th of the following year.
• 8:11
  SPEAKER_00: If you want to be back in the specific security by January 1st, you would need to sell no later than December 1st.
• 8:19
  SPEAKER_00: And you need to plan the harvesting calendar in October in order to give you the flexibility to manage these windows without being rushed.
• 8:28
  SPEAKER_00: October matters.
• 8:29
  SPEAKER_00: And by October, most of the year's gain picture is visible to an extent.
• 8:35
  SPEAKER_00: You know what you've realized, you know what's embedded in your portfolio and what losses are becoming available.
• 8:41
  SPEAKER_00: Not waiting until the end of November or December with the increased pressure.
• 8:45
  SPEAKER_00: It's reducing the quality of those decisions by pushing it off.
• 8:49
  SPEAKER_00: October is when you do the analysis or have your financial team do it.
• 8:52
  SPEAKER_00: November is when you make the decisions.
• 8:54
  SPEAKER_00: And December 26th is the last day to pull the trigger.
• 8:58
  SPEAKER_00: The sequencing is only possible if you start planning and having these conversations now.
• 9:04
  SPEAKER_00: I want to tell you about a woman named Catherine.
• 9:07
  SPEAKER_00: Obviously, details of this story have been changed in order to protect her identity.
• 9:12
  SPEAKER_00: Catherine was 63 years old, a recently retired CFO of a healthcare company.
• 9:16
  SPEAKER_00: Yes, even CFOs have financial advisors, and she had a significant taxable brokerage portfolio, around$2.4 million, that she had been managing on her own for years before she had retired.
• 9:29
  SPEAKER_00: She was financially sophisticated and she understood markets.
• 9:32
  SPEAKER_00: And she had never done a single tax lost harvesting in the 18 years of her investing career for herself.
• 9:40
  SPEAKER_00: Let's break down her situation.
• 9:42
  SPEAKER_00: Catherine came to me in January after realizing she had sold a large position in her former employer stock in October of the prior year, and she had a$340,000 long-term capital gain and had to pay approximately$81,000 in federal capital gains and NIIT taxes on that sale.
• 10:02
  SPEAKER_00: Here's what she didn't know.
• 10:03
  SPEAKER_00: Her portfolio actually had several positions that were underwater at the time of the October sale in the previous year.
• 10:10
  SPEAKER_00: A technology sector fund was actually down$47 from where she had purchased it.
• 10:15
  SPEAKER_00: And a healthcare ETF she had purchased was down$31,000 and another fund down$18,000.
• 10:22
  SPEAKER_00: She had combined unrealized losses of$96,000 sitting right there in her portfolio, unharvested.
• 10:29
  SPEAKER_00: She hadn't sold them because she still believed in them and what they could do in the future.
• 10:34
  SPEAKER_00: But here's the math.
• 10:36
  SPEAKER_00: If she had harvested those$96,000 in losses against that$340,000 gain, her net taxable gain would have been$244,000 instead of$340,000.
• 10:48
  SPEAKER_00: And at her tax rate, she would have saved around$22,900 just in federal taxes alone.
• 10:55
  SPEAKER_00: After harvesting, she would could have immediately reinvested into similar but not identical funds to still maintain that market exposure.
• 11:04
  SPEAKER_00: So here's what we did going forward: we implemented a systematic October review of all taxable positions for lost harvesting opportunities.
• 11:13
  SPEAKER_00: And we coordinated across all of her accounts.
• 11:16
  SPEAKER_00: And this included and ensuring that no IRA purchases would trigger wash sale violations.
• 11:22
  SPEAKER_00: We also evaluated whether direct indexing made sense for a portion of her portfolio, given its size.
• 11:30
  SPEAKER_00: Now let's break down every week as we do our three actions to go with from here.
• 11:34
  SPEAKER_00: Action one is I want you to ask your advisor this month to pull a report across all of your taxable accounts right now.
• 11:41
  SPEAKER_00: You want to know which positions in your taxable account are currently showing unrealized losses.
• 11:47
  SPEAKER_00: What is the dollar amount of those losses?
• 11:49
  SPEAKER_00: And what gains have you already realized this year that losses could offset?
• 11:54
  SPEAKER_00: Now, this report should take your advisor less than an hour to produce or someone on their team to produce.
• 12:00
  SPEAKER_00: And if they can't produce it quickly, that is important information about how actively your portfolio is being managed and also monitored.
• 12:09
  SPEAKER_00: Action number two is before executing any harvesting trades, ask your advisor to also take a look through any IRA accounts for wash sale risks, even if it's not what they manage, because you need to have this conversation.
• 12:21
  SPEAKER_00: This is a step that most people skip.
• 12:23
  SPEAKER_00: And if it can validate your harvesting entirely, it's one worth doing.
• 12:28
  SPEAKER_00: And if your advisor sells a security in your taxable account to harvest a loss and you own the same or substantially identical security in a traditional or WATH IRA, even if you haven't purchased it recently, a contribution or reinvestment into the IRA within that 30-day window could still trigger that wash sale violation.
• 12:47
  SPEAKER_00: So be aware of this.
• 12:49
  SPEAKER_00: This coordination across accounts, it is essential, not optional.
• 12:54
  SPEAKER_00: Action number three: if your taxable portfolio is$250,000 or larger, ask about direct indexing and if it is right for you.
• 13:02
  SPEAKER_00: This is one conversation that can change the long-term tax efficiency of your portfolio in a meaningful way.
• 13:09
  SPEAKER_00: I want you to ask given the size of my taxable account and my capital gains exposure, should we be evaluating direct indexing as a more systematic way to harvest losses on an ongoing basis rather than reacting at year-end?
• 13:24
  SPEAKER_00: This is a forward-looking question that positions you for a better tax outcome over the next decade and decades to come rather than just this year.
• 13:34
  SPEAKER_00: Tax loss harvesting, it's not inherently complicated, but doing it well, especially across multiple accounts without wash sale violations and with the right replacement securities and the right timing, it is a team effort.
• 13:48
  SPEAKER_00: October is when your team should be doing this work, not on December 28th.
• 13:53
  SPEAKER_00: At that point, it is just too late.
• 13:55
  SPEAKER_00: Next week's episode is going to be a little different and it's also going to be a lot of fun.
• 14:00
  SPEAKER_00: We are doing a Halloween special and we are going to talk about making finances less spooky.
• 14:04
  SPEAKER_00: So make sure you are subscribed and following along.
• 14:07
  SPEAKER_00: And if today's episode gave you something specific to do this week, I want you to share it with somebody in your network who might be sitting on unharvested losses right now so they can take advantage of this before year end and before it is too late.
• 14:21
  SPEAKER_00: And if you actually want to run this analysis on your portfolio, your specific accounts, your gains, your available losses, your wash sale risk, head over to tannisfingroup.com slash contact to apply for a complimentary intro call before we close them for year end.
• 14:38
  SPEAKER_00: Thank you for tuning in to this episode of the Wealth Cafe and see you next week as we make finances less spooky.