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  • Latest Insights

    Increasing Alpha By Reducing Taxes

    Investment and Asset Management

    Alpha is an investment term that means returns above-market performance. In other words, if the overall market is up 10% and your investments are up 12%, you’ve generated alpha of 2%. Astute investment selection is the most obvious way to add alpha to your portfolio, but it is not the only way. Reducing tax liability on capital gains is a less obvious way of increasing alpha by increasing your after-tax returns.

    The chart illustrates a technique known as Tax-Loss Harvesting

    As you’ll see, it involves:

    • Identifying positions in your taxable accounts that have unrealized losses
    • Selling those positions and realizing a loss
    • Using your losses to offset gains you’ve realized in other positions

    You can use this strategy to not offset not only capital gains but up to $3,000 in ordinary income per year. Losses above that amount can be carried forward for use in subsequent years.

    What's all this about wash sales?

    As the chart indicates, you can’t employ this strategy unless you adhere to Wash Sale rules. What does that involve?

    Imagine you sold a stock at a loss, but you still think it offers growth potential. You buy it back the next day and congratulate yourself for being so clever until tax season when your accountant informs you that you can’t use the loss for tax purposes.

    Wash Sale rules prohibit you from buying a substantially identical holding to the one you sold for 30 days before or after your sales date. Failure to adhere to this rule will mean that your loss will not be recognized for tax purposes.

    However, you can:

    • Buy a stock in the same industry or economic sector, if you wish to maintain the characteristics of your portfolio.
    • Wait until the 30-day Wash Sale period ends before buying back your stock.

    One more thing – you can’t sell a stock or other security at a loss for tax purposes and buy it back in another account, even in an IRA, during the 30-day period. You will run afoul of Wash Sale rules, and your loss will be disallowed for tax purposes.

    A loss can be a win

    Tax-loss Harvesting doesn’t necessarily involve conceding defeat by selling a security and placing the proceeds in cash until market conditions improve. You can continue to put your investment dollars to work in a security that resembles the security you sold. Plus, you are generating a loss for tax purposes that can increase the net after-tax return of your portfolio.

    That’s why at Lenox Advisors, we advocate year-round management of tax losses so you can draw on them as you need them. By doing so, you can make your investment decisions solely on the basis of whether an individual investment is a viable candidate for future growth, not on whether selling it would trigger a taxable event. To learn more about Tax-Loss Harvesting and which securities in your portfolio might be viable sales candidates, consult with your Lenox team.


    CRN202503-1959355