Tax-loss harvesting is one of the only investing strategies where loss can spark joy. After all, what’s not to love about shrinking your tax bill when you sell losing investments?
Professional investors typically suggest that the best time to harvest losses is at the end of the year, but there’s also a strong case for doing it year-round.
So which approach is best? Your ideal window for tax-loss harvesting depends on your needs and overall market conditions.
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The Benefits of Year-End Tax-Loss Harvesting
Investors who opt for a year-end tax-loss harvesting strategy appreciate efficiency and understand that they can benefit from end-of-year stock market trends.
Convenience and Costs
Harvesting tax losses at year-end makes a lot of sense for investors who rely mostly on taxable investment accounts and have tight schedules.
- It aligns with other year-end tasks. While maxing out your 401(k) and individual retirement account (IRA), you can also sell off losing investments in exchange for tax benefits in your non-qualified accounts.
- It simplifies transactions. Selling off the losers and searching for new investments, in which to reinvest your proceeds need only happen once.
- It can lower transaction costs. Since you’re not buying and selling throughout the year, you can to reduce trading costs.
Optimize Loss/Gain Matching
If your goal is to minimize capital gains taxes, harvesting losses once a year makes it easier to balance losses against gains.
For example, say you realized $2,500 in cumulative short-term capital gains during the year. In that case, you can choose which losing positions—and how much of each—to sell based on how close they’ll get you to that $2,500 figure.
Remember, you can only deduct annual losses up to $3,000 on your current year’s taxes. Amounts over $3,000 will be carried forward to future tax years.
The January Effect
The January Effect is an investing rule of thumb that states stock prices rise more in January than in any other month.
Brian Robinson, a certified financial planner (CFP) and partner at SharpePoint, says that year-end tax-loss harvesting puts investors in a prime position to benefit from January’s price gains, especially when they want to sell a stock and then repurchase it 31 days later, so as not to run afoul of the wash-sale rule.
“Assuming an investor sells for a loss in November, they can buy [the security] back 31 days later, providing they (have) owned it at least 30 days before the sale,” he says.
If you bought a certain stock on Oct. 15 and its price plummeted, you could sell it at a loss on Nov. 15 to harvest the tax loss. Then, you could repurchase the same stock on Dec. 16 without running afoul of the wash sale rule, presuming you thought it would gain in value.
This same timeframe can also help you enjoy the Santa Claus rally (which isn’t a gathering of shopping mall Santas). The year-end stock market rally typically starts the last week of December and extends into the first two trading days of the new year.
The Benefits of Year-Round Tax-Loss Harvesting
For hands-on investors, once-a-year tax loss harvesting might feel too passive. A year-round tax loss strategy might be a better choice, giving you access to a broader range of seasonal market trends.
Maintaining Portfolio Strategy
Capturing gains is a double-edged sword: Sure, you harvested a nice profit, but the sale leaves your asset allocation out of whack.
Michael Becker, a chartered financial analyst (CFA) with Hightower Wealth Advisors, says that harvesting losses year-round can benefit your taxes and portfolio health. The key, he says, is ensuring there are viable holdings to replace the position you’re selling at a loss.
For instance, if you’re selling a losing FAANG stock, you’ll want to ensure there’s another FAANG stock to take its place. While that sounds easy, you might find that all of your replacement options sit right at analyst price targets.
In that case, you can still harvest your FAANG stock loss and use multiple stocks or an index fund to keep your asset allocation on track until a favorable FAANG stock comes along.
Access to Year-Round Market Trends
While the January Effect lines up with taking harvestable tax losses at year’s end, there are plenty of trends you’ll miss out on with solely an annual approach.
- Looking for gains? January and April have proven profitable months.
- Riding an election-year tide? The last three months of midterm election years are historically good for stocks.
- Hungry for harvestable losses? June’s not known for robust returns.
More Nimble Response to Economic Conditions
From geopolitical pressures to events in the socioeconomic zeitgeist, the stock market bends to them all. A year-round loss harvesting strategy can improve your portfolio’s response to a wide range of tides.
For instance, say you felt your portfolio was underweighted in energy as the 2022 bear market took hold. You can harvest losses from nearly any other sector in your portfolio and reallocate those funds to energy stocks. You’d then be able to capture sector gains created by skyrocketing oil prices.
Tips for Year-Round Tax-Loss Harvesting
You don’t have to stay glued to your brokerage account to find promising tax-loss harvesting opportunities year-round. Instead, it’s best to set up a strategy and then use trading tools to put it on autopilot.
Develop a Strategy
Becker suggests that investors create loss thresholds to help guide harvesting decisions throughout the year.
For example, you could set a 15% loss threshold for all your holdings. Thresholds can help avoid emotional investing decisions and only trigger a sale based on strategy.
Automate the Process
Once you have specific loss thresholds, Robinson suggests investors automate harvesting through trading tools like sell-stop or limit orders.
For example, you can place sell orders that align with your loss thresholds, just as you would use limit orders to capture gains at a set price target.
Stay Flexible
While a year-round loss harvesting strategy opens up many opportunities, it’s far from gospel. Flexibility is key to any successful loss harvesting strategy.
For instance, Becker says he avoids harvesting during times of heightened market volatility as it could lead to missing out on market participation—for better or worse. Therefore, in turbulent years, you may fare better harvesting only at year’s end.
Whichever strategy you choose as a baseline—year-end or year-round—flexibility may well be the best rule you can use in every year and market.
