If Mitt Romney truly didn’t pay taxes for even one of the ten years that Harry Reid claims, he may have accomplished this by using a technique known as “tax-loss harvesting.” This legal strategy is not exclusive to the wealthy; those with investment portfolios in the six-figure range can employ it as well.
Wealthfront, an automated investment management service catering to young tech professionals experiencing financial windfalls from IPOs, is unveiling an automated tax-loss harvesting service for clients with a minimum of $100,000 in their accounts. Once regarded as a complex tactic employed by elite accountants for the ultra-rich, tax-loss harvesting is actually a straightforward approach to reduce tax obligations.
Imagine you own shares in two mutual funds. If one appreciates and you sell it for a profit, this is classified as a capital gain. Conversely, if the other fund depreciates, you sell that one too.
Now, you might wonder, isn’t the common wisdom to “buy low, sell high”? Here’s where it gets interesting: When you sell the underperforming mutual fund for a loss, you can offset that loss against the gain from the profit-making sale. Moreover, you have the option to reinvest the proceeds from the sold shares into a different fund of similar value. Effectively, you’ve realized a loss without losing ownership of other shares; you’ve “harvested” the loss without sacrificing your investment.
Wealthfront plans to utilize the same software-based methods for tax-loss harvesting as it does for managing its clients’ portfolios across various asset classes including stocks, bonds, and real estate, adjusting investments as market conditions evolve. The company claims that this strategy can enhance after-tax returns by over 1 percent annually. Recently, the IRS disclosed that a small number of the nation’s wealthiest individuals paid no federal income tax, with evidence suggesting they utilized tax-loss harvesting strategies. Now, even those with a modest portfolio can benefit from techniques traditionally reserved for the wealthiest tier.