Tax Loss Harvesting
Tax loss harvesting is the realization of unrecognized losses within a portfolio with the intent of offsetting realized gains and creating tax savings within a given tax year. While this can create value, here are some things to consider.
Many times, from a value perspective, a security that has fallen in price can become more attractive if its intrinsic value has not also fallen, or fallen less than its price. If dealing with an individual security that has unrecognized losses, because wash-sale tax rules eliminate any tax benefit if the same security is repurchased within 30 days, selling it to realize its loss for tax purposes simultaneously exposes the seller to a risk of favorable movement during this sideline period. Said differently, if a security was bought because it was undervalued and has since become more undervalued (this is what generated the paper loss), from a purely investment perspective it's likely that you'd would want to buy and not sell. Therefore, selling strictly for a tax benefit should be carefully examined and the potential tax benefit not viewed in isolation.
Even if dealing with a fund or some other vehicle that may circumvent the wash-sale period, allowing the seller to immediately reinvest the sale proceeds, it should be understood that tax loss harvesting may actually be a tax deferral and not permanent tax savings. Selling a security at a loss and reinvesting the proceeds in a similar security effectively resets the cost basis to the lower market value, potentially increasing future tax liabilities. In other words, taxes saved now may be simply postponed. The value of tax loss harvesting is largely in deferring the payment of tax liabilities.
Strategically realizing losses to offset gains should be considered every year, however it should be done while also considering the investment rationale and risks.