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The Tax Loss Harvesting Ratchet

The Tax Loss Harvesting Ratchet

| August 30, 2022

One of my favorite tools is the ratchet. Not only is it the perfect-sized tool for what I am working on, but its relentless and solid one-way progress also makes a valuable impact on the job.

No matter how quickly it moves back and forth on the bolt of my kid’s playset or my lawnmower, I know the tool does its job right by only allowing progress to be made in my chosen direction.

In the financial planning world, the right tools make all the difference, too. They allow us to hit our financial goals with less risk and with a higher likelihood of success. Having the right tools at our disposal also makes it easier to complete our financial projects sooner with less variability of results.

One of the big hairy problems we often encounter is a highly appreciated position in one or more stocks. If held outside of a tax-sheltered retirement account, you might feel stuck, unwilling, or unable to accept the tax hit just to diversify your assets. Investors commonly have such disdain for paying more taxes, but sometimes it is the prudent move in the long run. Moreover, we can use planning techniques to lessen the tax burden.

As you probably know, having too many eggs in one basket can severely harm your chances of financial success. If you happen to own shares of the “next Microsoft,” you should certainly consider decreasing your single-stock risk. Selling shares with a big capital gain can be a huge tax cost that must be carefully considered.

One tool on our belt is what I like to call the “Tax Loss Harvesting Ratchet.”

After careful diligence, we can implement a plan to regularly harvest losses in other investments to offset gains from selling your most appreciated stocks. This process allows you to move more money into other more diversified (and thus lower-risk) positions.

Throughout the ups and downs of market cycles, the strategy can significantly reduce your concentrated positions without taking a big tax hit.

If any of this might apply to your situation, we’d love to see if we can help you further.

The last big opportunity we had to execute the Tax Loss Harvesting Ratchet was 2020 before this year’s market drop. These plans are usually best put in place during good times, as a bear market, with all its volatility, is not the ideal time to look closely at the numbers.

We are happy to do that, of course, but we think it’s better to craft the plan and then wait for the right time to execute the strategy. That said, depending on the state of the stock market recovery when you read this, there might still be time to make strategic moves within your portfolio if you are interested in reducing a concentrated position.

It is important that you check with your tax preparer before undertaking any significant tax decisions. There are also other ways to manage concentrated stock positions. The Tax Loss Harvesting Ratchet is just one we wanted to highlight.

Thanks for taking a look!

Your ISC Team