Robert Keebler's Excel-based Loss Harvesting Calculator

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Tax increases that went into effect at the beginning of 2013 highlight the growing realization among investors that it isn’t what you earn that counts, but what you keep after taxes. The American Taxpayer Relief Act of 2012 (ATRA) increased the top tax rate on dividends and long-term capital gains from 15% to 20% and the top rate on ordinary income and short-term capital gains from 35% to 39.6%. When the new 3.8% tax on net investment income is added, the total tax rate on interest, rents, dividends, annuities, royalties, non-business capital gains and passive activities can increase to as much as 23.8% for long-term capital gains and 43.4% for ordinary income. Over time, taxes can have a profound effect on the amount of wealth that can be accumulated.

Loss harvesting means selling assets at a loss and using those losses to offset capital gains realized on other assets. On the surface, it might appear that loss harvesting produces an economic benefit equal to the tax saved in the current year. It is important to recognize, however, that assuming tax rates stay the same, loss harvesting provides only a timing benefit. This is best understood by considering the overall transaction and not just the initial loss harvesting. Taxpayers who sell stocks to harvest losses typically wait 31 days to avoid the wash sale rules and then reacquire the stock. While this reduces or eliminates current capital gain, it also gives the taxpayer a lower basis in the replacement shares and, thus, increases the gain recognized when these shares are later sold. The total gain recognized is the same, but loss harvesting creates tax deferral, which can be determined using Robert Keebler's Excel-based Loss Harvesting Calculator.

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