Call me an optimist, but I like to see the positive side in things. Most people are unhappy when their investments decrease in value, and I’m no exception. But I keep a silver lining in mind: My investment losses can potentially become tax benefits through a process called tax-loss harvesting.
While many investors focus on tax-loss harvesting toward year end, it’s a strategy that can help you year-round. That’s particularly true during times of market volatility, as we’ve seen in the past few years.
Meeting financial goals takes a combination of planning and an inventive edge. There is no one winning strategy. The best strategy may be a combination that’s constructed just for you. And at Morgan Stanley, we can build that together.
But there’s one component that is often overlooked—even though it can make the biggest difference over the long run: taxes.
Taken together, tax-aware solutions, may potentially add up to 2% to your annual returns, on average, depending on your specific portfolios and approaches.
By adding our complimentary -- and personalized -- Tax Management investment platform to your taxable managed account, we can help maximize your potential after-tax return, year-round. That’s our Total Tax 365 approach.
Do you want to be more in control of your capital gains each year? Our platform enables you to set gain or tax limits that put you in control of the impact of taxes on your investments. Because after all, taxes are personal.
While tax-loss harvesting is common for many investors these days, it tends to be labor intensive. Morgan Stanley’s advanced platform lets you design your own tax-loss harvesting experience.
For instance, you can select the loss harvesting frequency, your loss targeting approach or customize our opportunistic tax-loss harvest feature that systematically identifies losses to capture throughout the year.
And when losses are created, we look to preserve those losses by adhering to certain IRS wash sale rules so that those realized losses can help potentially offset future gains.
In today’s market, every trade decision matters. But how you tax-optimize your trades may matter even more.
That’s why we also provide our best-tax-outcome approach when trading your securities. This feature looks through your various tax lots and attempts to achieve the most favorable tax outcome on every sale transaction.
Lastly, if you are considering transitioning assets to Morgan Stanley, but are concerned about large capital gains and subsequent taxes, don’t be.
Our sophisticated platform helps you unwind existing positions into a new diversified investment portfolio gradually, and on your terms.
And every step of the way, we report back results that show how much tax savings you may have captured over time. Because the returns you keep are the ones that count.
So, when working to meet your financial goals, you set the rules. Together, we’ll refine your strategy … and offer the tax-smart edge that puts you in control of your assets and your wealth.
Contact your Morgan Stanley Financial Advisor and ask how to enroll in this complimentary service.
Tax-loss harvesting: How does it work?
Tax loss harvesting is a tax-efficient investing strategy that can help minimize the amount of current taxes you have to pay on your investments. Under current U.S. federal tax law, you can offset your capital gains with capital losses incurred during that tax year or carried over from a prior tax return. Capital gains are generally the profits you realize when you sell an investment for more than you paid for it, and capital losses are generally the losses you realize when you sell an investment for less than you paid for it.
Since U.S. investors are taxed on net capital gains, offsetting capital gains with capital losses can lower your taxable income (provided you’re a U.S. taxpayer). Let’s say that I earn a profit of $30,000 by selling Fund A. Meanwhile, I notice that Fund B is down by $15,000. By selling Fund B, I can usually use those capital losses to partially offset my capital gains from Fund A—meaning I’d only owe taxes on $15,000 of profit instead of $30,000.
“Harvesting” that $15,000 loss, in this case, would have no effect on my portfolio’s value, and I could use the proceeds to buy a similar investment, subject to the "wash sale” rules. That would allow me to maintain roughly the same asset allocation while reducing my federal income taxes, leaving me with additional funds that would remain in my investment account continuing to earn investment gains.
Your losses don’t just offset your gains; they can also offset up to $3,000 of ordinary income each taxable year. Let’s say I still realized a profit of $30,000 from Fund A. But in this scenario, Fund B lost $33,000. Assuming I had no other capital gains or losses for the year, I could use my loss to offset my entire gain from Security A, plus I could offset $3,000 of my ordinary income, further reducing my current income tax liability or possibly increasing my tax refund.
One thing to watch out for: wash sales
You’ll want to make sure you don’t inadvertently participate in a “wash sale,” which occurs when you sell or trade stock or securities at a loss and buy the same or substantially identical stock or securities within 30 days before or after the sale. Basically, it says that I can’t sell Security B and then immediately buy it back again just to get the tax benefit, and if I do so, the capital loss will be deferred. I am, however, allowed to claim the loss currently if I sell one stock and buy another one in the same industry—just not stock in the same exact company as before, or another investment the IRS would consider “substantially identical” to the one I sold.
Another thing to watch out for: short-term capital gains
The government incentivizes people to invest for the long-term rather than constantly buying and selling on ephemeral news. It does so by taxing short-term capital gains (profits made from selling investments held for a year or less) at a higher rate than long-term capital gains (profits from investments held longer than a year). So, it can have a particularly high impact on your tax bill to offset short-term investment gains with losses. Under current tax law, you’ll owe the tax rate on long-term capital gains (the maximum rate is 20 percent), while short-term capital gains get taxed at your regular income tax rate.
So, tax-loss harvesting can make a bigger difference if you trade a lot, or have invested in strategies that see higher turnover and thus more short-term gains. Note that there are certain rules in the Internal Revenue Code that dictate whether particular capital losses offset short- versus long-term capital gains.
With Total Tax 365, your Financial Advisor can integrate tax aware strategies into your investment plan to help you mitigate capital gains tax in your portfolio while managing risk.
In addition, if you have complex tax planning needs, your Morgan Stanley Financial Advisor can connect you to experienced tax professionals at leading U.S.-based providers across the country to help optimize your tax strategy. Connect with your Morgan Stanley Financial Advisor to learn more.
Of course, there’s no guarantee that tax-loss harvesting will achieve any particular tax result, or that it’s necessarily the best thing for you. Before implementing any tax strategy, check with your accountant or other U.S. tax advisor.
