Tax-Loss Harvesting: A Key Investing Strategy for October Markets

Exploring Tax-Loss Harvesting Strategies in October

If you own underperforming stocks or ETFs and seek to save money on taxes next April, it may be time to consider a popular strategy called tax-loss harvesting. According to a recent note by Morgan Stanley, October is a peak month for employing this tax-efficiency method as the end of the year draws near.

How Tax-Loss Harvesting Works

The concept is straightforward: sell stocks that have diminished in value since purchase and utilize the capital loss to offset taxes owed. There are two main approaches to benefits from tax-loss harvesting:

• Reducing regular taxable income from salary or dividends by up to $3,000 yearly from capital losses.
• Offsetting capital gains by closing losing positions and selling winning ones.

Key Benefits and Considerations

Chris Chen, a certified financial planner, emphasizes that maximizing benefits typically involves managing both capital gains and losses simultaneously. For instance, selling a $2,000 losing position can effectively neutralize gains of the same amount.

Post-transaction, investors must wait 30 days to buy back the position sold for a loss while they can reinvest immediately from profitable positions. If cash liquidity is a concern, investing in a stable alternative within the same market sector can ensure continued exposure.

Optimal Timing for Tax-Loss Harvesting

According to Morgan Stanley, stocks typically incur the most downward pressure due to tax-loss harvesting around October. Stocks rated highly by analysts but have declined 10-25% in the year’s initial nine months may be set to underperform the S&P 1500 by 1-2% in October due to these activities.

This increase in market activity is due to the impending tax calendar deadlines and the desire to capitalize on losses before positions recover. However, Chen advises that while timing can be relevant, proactively harvesting losses should remain a priority in volatile markets.