Turning Market Moves into Tax Planning Opportunities

While market ups and downs are part of investing, they can also open doors to tax savings. Even though volatility can feel uncomfortable, two tax strategies allow you to turn market swings into an advantage: tax loss harvesting and tax gain harvesting.

Harvesting Tax Losses

Tax loss harvesting means selling investments that have dropped in value to capture the loss. At first, it sounds odd to lock in a loss on purpose. But those realized losses can offset capital gains elsewhere in your portfolio and, in some cases, reduce the income you pay tax on from wages, pensions, or other sources. It’s a way of making the most out of a downturn while still keeping your long-term plan intact.

For example, an investor who sold a property and realized a large gain could potentially offset some of that gain by harvesting losses in their stock portfolio, depending on their individual situation. By harvesting losses in their stock portfolio, they could shrink their tax bill without changing their overall investment mix. Still, this approach isn’t for everyone. Selling solely for tax reasons can pull you away from your long-term investment plan. And the IRS “wash-sale” rule prevents you from buying the same or a nearly identical investment within 30 days, which means you could miss out if the market rebounds quickly.

Harvesting Tax Gains

Tax gain harvesting flips the concept around. Instead of selling losers, you strategically sell winners, often in years when your income is unusually low. By realizing gains while in a lower tax bracket, you may pay little or no tax at all, while also raising the starting point for measuring future gains, reducing what you might owe later.

To illustrate, picture a couple in early retirement who are living on cash savings before Social Security or Required Minimum Distributions (RMDs) begin. By harvesting gains on appreciated stocks during these low-income years, they may be able to realize profits at little or no tax cost, potentially reducing future tax exposure, depending on their overall tax situation. On the other hand, this strategy can backfire if the gains push you into a higher bracket than intended or if you plan to pass assets to heirs, who often benefit from a step-up in basis at inheritance.

Putting It in Context

Both strategies can be useful, but they work best as part of a broader financial plan. Harvesting losses without coordination can leave you sitting in cash just as the market recovers. Harvesting gains without foresight can trigger surprise tax bills. The real value lies in integrating these tools into your retirement income strategy, tax outlook, and even your estate or charitable goals.

Volatility is inevitable, but thoughtful planning can sometimes turn market swings into opportunities. Whether harvesting losses or gains makes sense depends on your specific circumstances, and these strategies should be carefully evaluated within the context of a comprehensive financial and tax plan.

This information is educational in nature and not intended as specific tax or investment advice.