By virtually any measure, 2024 has been a very good year for investors. If you made money in a taxable (non-retirement) account, it is likely some of it will result in realized capital gains for the 2024 tax year.

And as much as we want to see positive returns on our portfolios, it is well within our rights to take advantage of any opportunity the tax code affords us to do anything we can to keep as much of that return from Uncle Sam and state and local governments.

I learned about the old saying “It’s not what you make but what you keep” in an impactful way as a 15-year-old after landing a job at my local supermarket.

I brought valuable skills to the table every day on that job – the energy of a 15-year-old and a willingness to do anything the full-time employees refused to do!

But my real education came after 90 days, when, with much fanfare, I was presented a union card proclaiming me to be a member in good standing with the local grocery union. And better yet, I got a raise that same day from $2.50 an hour to $3.25 an hour!

With dreams of now being able to afford to take a date to the movies, I excitedly opened my first upgraded paycheck only to find out that my net pay had not budged. “There must be some mistake” I told my manager, “what happened to my extra 75 cents an hour?”

“That goes to pay your union dues my boy” the manager said with a wry smile. “And if you stay on and make a career here at the local Foodtown, you’ll eventually get bigger and better raises.”

Two things crossed my mind then – I’d better go to college and it looks like I’m going to see “Jaws” by myself!

So let’s celebrate our foresight and good fortune with a growing balance sheet, but also consider executing a strategic practice that can help minimize our tax liability: tax-loss harvesting. Think of it as making lemonade out of lemons.

What Is Tax-Loss Harvesting?

Tax-loss harvesting involves selling investments in taxable accounts that have decreased in value to offset the taxes owed on gains from other investments. By carefully harvesting these losses, you can potentially reduce your tax bill while keeping your long-term investment strategy intact.

How Do You Do That?

• Add up your realized gains for the year (taxable accounts only), broken down by whether they are classified as short-term (held less than one year) or long -term (held one year or longer)

• Identify underperforming investments that may be good candidates for tax-loss harvesting

• Sell these securities, with a particular focus on realizing as many short-term losses as possible

• Avoid the “Wash-Sale” rule with the sale proceeds – you may still like the security being sold for a loss, but you must be sure to wait at least 31 days to buy it back to comply with IRS regulations and avoid disqualifying your loss

• Consider purchasing a comparable asset, or proxy, that meets your portfolio needs without triggering this rule to remain invested to avoid unintended market timing – easily done in today’s world of exchange traded funds (ETFs)

How It Works

Imagine your realized gains in 2024 were $100,000. At maximum long term capital gains tax rates (23.8% including “net investment income tax”), you would owe $23,800 in tax on this gain on April 15, 2025.

But if you managed to sell some securities, on or before December 31 this year, that have declined in value by $50,000, you will have managed to cut your tax bill in half to $11,900 while remaining invested.

At Proquility, we know from experience that the market is up most of the time. When we are presented with the opportunity to realize losses, whether to offset existing gains or to carryforward into future tax years, we often take it.

I never had a lemonade stand, but these days I make lemonade for our clients with regularity!

Final Thoughts

We consult and collaborate with tax professionals all the time to minimize the tax liabilities of our clients – understanding the nuances of your tax situation and long-term investment goals is essential. A good team of professionals can help you optimize your strategy.

Tax-loss harvesting can also help align your portfolio rebalancing objectives with investment goals, while also raising cash as needed for anticipated expenses, all without adding a significant tax cost. By strategically realizing losses, you can reduce your tax liability while keeping your financial goals on track.

It’s not what you make, but what you keep!

We are blessed to enjoy the many families we serve who started as clients but are now also friends. Wishing you and your family the happiest of holiday seasons and a healthy New Year 2025!

Andy, Patty, and the Proquility Team