If you’re an investor going through a divorce, you likely have a keen eye on your finances. You may already be familiar with tax loss harvesting, a strategy that can help reduce your tax bill by selling investments at a loss to offset capital gains. While this technique can be a smart financial move, it can also have unintended consequences in divorce—potentially turning what you thought was your separate, non-marital property into a shared marital asset.
What Is Tax Loss Harvesting?*
Tax loss harvesting is a strategy that can be used to lower your tax liability. For example, if you have investments in a taxable brokerage account that have lost value, you can sell them at a loss to offset capital gains from other investments. This reduces your overall taxable income and can lead to significant tax savings.
There are many rules associated with tax loss harvesting. For example, you cannot sell a mutual fund at a loss and then immediately repurchase that same mutual fund. However, one strategy that many investors utilize is to sell one investment at a loss and then purchase a similar, but different, investment. For example, you might sell VTSAX, the Vanguard U.S. total stock market index fund, at a loss and purchase VFIAX, the Vanguard S&P 500 index fund, which is highly correlated with VTSAX. The White Coat Investor website has a really good explainer on tax loss harvesting.
Many investors use this approach as part of a long-term financial strategy, reinvesting the proceeds into different securities to maintain their investment portfolio. However, if you are going through a divorce, you must be careful about how and when you execute tax loss harvesting.
*Please note that we are not accountants, financial advisors, or tax lawyers, this information is not intended to provide advice, and this is for educational purposes only.
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