Tax loss harvesting can be beneficial for many investors—provided that the IRS allows you to write off losses against capital gains and/or up to $3,000 of ordinary income. Any losses not used to offset gains and/or $3,000 of ordinary income can be carried forward indefinitely until used up. The earlier you start tax loss harvesting—and the higher your current tax bracket—the more beneficial it can be over time.
However, harvesting causes you to lower your basis, which can mean more taxes in the future—unless you don’t plan to liquidate your investments. That means deferring all gains can be an especially good strategy if you plan to donate to charity or leave your assets to your heirs, which results in a step-up in basis.
There are some specific instances when you should not use TLH+ or should proceed with caution. Tax deferral may be undesirable if your future tax bracket will be higher than your current. If you expect to achieve (or return to) substantially higher income in the future, tax loss harvesting may be exactly the wrong strategy—it may, in fact, make sense to harvest gains, not losses.
In particular, we do not advise you to use TLH+ if you can currently realize capital gains at a 0% tax rate. Under current law, this may be the case if your taxable income is below $39,375 as a single filer or $78,750 if you are married filing jointly. See the IRS website for more details. Also, if you are planning to withdraw a large portion of your taxable assets in the next 12 months, you should wait to turn on TLH+ until after the withdrawal is complete to reduce the possibility of realizing short term capital gains.
Please consult your tax advisor if you have questions about how these guidelines may apply to your personal situation.
You can read more about best use cases in our white paper.