How Does Tax-Loss Harvesting Work?

[00:00] it's Brian Preston the money guy so how

[00:03] does this play out in the real world and

[00:05] before we talk about a strategy like a

[00:08] real life actual strategy you could be

[00:10] employing it's important to have some

[00:12] context you guys have seen this chart

[00:14] before but what this chart lays out for

[00:15] you is all of the bear markets and all

[00:18] the bull markets from 1942 all the way

[00:21] through this year uh the length of the

[00:24] of the market shows how long it lasted

[00:27] and then the the depth or the height of

[00:29] it shows how severe it was so what you

[00:30] can see here is that

[00:32] more often than not bull markets are

[00:35] substantially more severe in a positive

[00:39] way than bear markets severe sense of

[00:41] negative bull markets are awesome

[00:43] they're awesome more awesome than bear

[00:45] Mark but see that's just kind of a given

[00:47] more awesome than the bearers the

[00:48] gravity through which you experience a

[00:50] bull market way outpaces the gravity

[00:53] which you experience in a bear market

[00:54] and they tend to last for a lot longer

[00:57] of a period of time so even when you're

[00:59] going through periods of volatility like

[01:00] this it's important to remember that

[01:02] it's important to keep that archive in

[01:03] the back of your mind well that's why

[01:04] here's The Optimist take of this and

[01:07] Bo's already thrown out one of my slides

[01:08] but this is a way for me to put it back

[01:10] in for Daniel's benefit too is that I

[01:13] would we know that fortunately bull

[01:14] markets last much longer and happen more

[01:17] frequently than bear markets so I think

[01:20] that this puts a priority on the fact

[01:22] that when we do have that two out of 10

[01:23] years you want to be like a squirrel

[01:25] who's harvesting and putting a bunch of

[01:27] nuts to save for the winter because

[01:29] there will be really good gains in the

[01:32] future future so the harder you work

[01:34] while things are cold outside you know

[01:37] and you're harvesting and just say that

[01:38] you will see that the the benefit for

[01:41] this for many years in the future you

[01:43] are filling up that Silo of losses

[01:45] that's one of the things I'm telling you

[01:47] me personally I'm talking about my

[01:49] personal portfolio plus what we do for

[01:51] all of our clients I've done this at

[01:53] least twice this year because I take it

[01:55] very serious and we're gonna have an

[01:56] example of how that boom bust Cycle

[01:59] Works this is not a setup and forget it

[02:01] one and done this is something that you

[02:04] actually can use this strategy

[02:05] throughout the volatility of the market

[02:07] so that as we come through this

[02:09] short-lived bear Market you will be able

[02:12] to hit the ground running and really

[02:13] have a really strong tax strategy for

[02:15] when things are good too but you got to

[02:17] be a financial mute you have to

[02:19] recognize that these opportunities don't

[02:21] happen all the time you can see in the

[02:23] chart that we just showed that bear

[02:25] markets don't happen all that frequently

[02:27] despite what the financial media might

[02:29] suggest to you so when we have these

[02:31] large drawdowns like what we're seeing

[02:33] this year it makes a lot of sense to

[02:35] capitalize on them it makes a lot of

[02:36] sense to be able to take advantage of

[02:38] them so let's do a real world

[02:41] live case study based on something that

[02:44] could have happened this year in the

[02:46] year 2022. so let's say that Jasmine has

[02:49] a hundred thousand dollars invested in

[02:51] an S P 500 Index ETF on January 1st of

[02:55] 2022. let's also assume this holding is

[02:57] held inside of our taxable brokerage

[03:00] account

[03:00] she decides that man this year has been

[03:03] volatile and I'm going to take advantage

[03:05] of loss harvesting so every time my

[03:07] holding drops by ten thousand dollars

[03:09] I'm gonna go Harvest those losses and if

[03:11] you look from January through September

[03:13] that occurred in February and then it

[03:16] occurred again in June so here's the

[03:19] Practical nature of what Jasmine did

[03:22] on February 23rd she sells her S P 500

[03:26] ETF to harvest a little over 11 000 of

[03:30] losses she then takes the proceeds from

[03:32] that sale

[03:33] and immediately buys a total market

[03:36] index ETF so as not to violate the wash

[03:39] sale rules they are similar but not

[03:42] identical well then if you remember uh

[03:45] she starts feeling pretty good second

[03:46] quarter started off pretty nice she's

[03:48] like oh wow this worked all I lost

[03:49] harvest the market started making money

[03:52] and then the shoe dropped and then it

[03:53] happened again and then the market in

[03:55] the second quarter continued to drop

[03:58] and so then she decides you know what on

[04:00] June 13th I have crossed over that ten

[04:02] thousand dollar loss mark again so now

[04:04] on June 13th what I'm going to do is I'm

[04:06] going to sell my total market index I'm

[04:09] gonna Harvest another 10 600 of losses

[04:13] and because it's been 30 days since I

[04:16] last did that transaction I'm gonna buy

[04:19] back into the S P 500 Index Fund now so

[04:22] I own the s p i got out of it I rode in

[04:25] the total Market it lost money too I

[04:27] harvested that loss now I got back in

[04:29] the s p 500. well I think that's

[04:32] interesting though if you just bring up

[04:34] the the visual again a lot of people the

[04:37] the naysayers or the the I'll just call

[04:39] them the trolls under the bridge that

[04:40] are going to come out in the comments

[04:42] section they'll say guys why'd you do

[04:44] all these trades why wouldn't you just

[04:45] wait until

[04:46] and just buy them while you do this

[04:49] horse harvesting one time in June when

[04:51] it was at the lowest and it's exactly

[04:53] what you shared and that's why I feel

[04:54] like I'm just giving the the commentary

[04:56] of answering the unspoken part is that

[04:59] we never know when markets are going to

[05:01] recover if you think about like the

[05:03] pandemic of what happened in 2020 the

[05:05] market got crushed went down to 35 but

[05:07] then shot off like a rocket we harvested

[05:10] losses in that downturn but then we hit

[05:13] recovery mode so fast that if you were

[05:16] trying to wait for the second or even

[05:17] the third so you would reached the dead

[05:20] bottom you might have missed it that's

[05:21] right so we don't remember we none of us

[05:23] have the crystal ball of knowing what's

[05:25] going on and when the full recovery

[05:27] because there might be some false

[05:28] positives or false recoveries that occur

[05:30] in any bear Market even in 2008 if you

[05:33] remember after the election season of

[05:36] 2008 the market actually closed up at

[05:39] the end of the year not for the year it

[05:41] was still down 37 but it was at a low of

[05:44] over 50 percent down but then it closed

[05:46] up and closed down 37 because it did

[05:49] have a 10 to 15 percent recovery right

[05:51] after the election cycle before we went

[05:54] right back down to the intested the

[05:56] bottoms of January through March of 2009

[05:59] it's not uncommon to have those fits and

[06:01] starts where things start look like

[06:03] they're getting better that's why you

[06:06] might do this multiple times in a year

[06:08] is because you think you're at a bottom

[06:10] you harvest losses we have a temporary

[06:12] recovery then we fall even lower you

[06:15] harvest again I know it's creating work

[06:17] for you but it shows up and it does

[06:20] create value over the long term pay

[06:22] attention to these cycles and so where

[06:24] is Jasmine net net so through October

[06:27] 12th of this year she's harvested 21 000

[06:31] than seven hundred dollars in losses now

[06:33] what those losses can do is they can

[06:35] offset capital gains this year if she

[06:38] all sets all of her capital gains they

[06:39] can offset three thousand dollars of

[06:41] ordinary income and anything left over

[06:43] can move into future years and in those

[06:45] future years it can offset capital gains

[06:48] or it can offset up to three thousand

[06:49] dollars of capital losses I mean of

[06:51] ordinary income a lot of people don't

[06:53] really say well I don't want to harvest

[06:55] any more loss I've harvested plenty I've

[06:57] harvested plenty of harvested plenty

[06:58] remember bull markets last for a long

[07:02] time and you can have a down year where

[07:05] man it feels painful but the next year

[07:07] is pretty good and you can use those

[07:08] losses and the next year is pretty good

[07:10] you can use those losses the next it's

[07:12] not uncommon to be able to harvest

[07:13] losses in one year they can offset

[07:16] triggered gains for the next number of

[07:19] years you're basically getting to invest

[07:20] your portfolio tax-free which is a super

[07:23] super awesome thing to be able to do

[07:25] well it's not uncommon look I'm going to

[07:27] talk in reality here for from a

[07:29] financial planner is that for seven

[07:32] figure portfolios it's going to be a

[07:34] six-figure loss that you've harvested

[07:36] and you're like well why would I mean 3

[07:39] 000 is all I can offset are we really

[07:40] going to take a hundred thousand two

[07:42] hundred thousand dollars of of losses

[07:45] that we're just gonna carry forward yes

[07:47] yeah because there will be there will be

[07:49] some years in the future where you're

[07:51] gonna have distributions at year end or

[07:54] you have some big transaction yourself

[07:56] you're going to be so thankful that you

[07:58] had the losses to offset those gains so

[08:01] you you got to essentially experience

[08:03] the recovery without having to pay the

[08:07] taxes on all those distributions