Ask most investors, and they’ll tell you October 8–12 was a no good, horrible, very bad week. They’re not wrong.
The S&P 500® Index lost more than 4% of its value—over 3% on Wednesday alone—in a broad sell-off in reaction to, depending on whom you ask, worries about trade, interest rates, tech-stock valuations, or all three. But did the downside wind that slammed the bull-market door shut for the moment also open a window to something potentially valuable?
Amid market volatility, a tax opportunity
Let’s not forget that, despite last week’s slide, we’ve been in a historic bull-market run. Many investors’ portfolios had appreciated greatly during the decade-long streak, which meant fewer securities trading at a loss. Which in turn meant, if an investor had sold securities at a gain, there was perhaps little to help offset the taxes due that year on said gain.
But now, with last week’s sell-off, if investors have securities trading at a loss, there’s an opportunity to make good and timely use of those losses—a tax-management process called tax-loss harvesting.
What is tax-loss harvesting?
When securities are trading at a loss, selling them creates a realized tax loss investors can use to offset a capital gain realized in the same year. They can then be replaced with a similar set of securities (traded carefully to avoid tripping the IRS’s wash-sale rules) to preserve an investor’s exposures to the desired market sectors or factors.