When it comes to building wealth, reducing unnecessary tax burdens is just as important as making sound investment decisions. One effective strategy many investors use to optimise their tax obligations is tax loss harvesting. This approach can help you minimise taxes, maintain your portfolio’s growth potential, and make the most of your investments over time.
Here, we’ll break down everything you need to know about tax loss harvesting, how it works, and how you can use it as part of your wealth-building strategy.
Understanding tax loss harvesting
Tax loss harvesting is a strategy that helps investors reduce their tax burden by selling underperforming assets at a loss to offset capital gains. In Europe, capital gains tax rates vary widely : Denmark imposes rates as high as 42%, while Belgium and Slovakia have 0% rates under specific conditions, making tax efficiency a key consideration for investors.
Strategically realising losses enables investors to lower their taxable income while maintaining their investment strategy. Such an approach applies to a range of asset classes, allowing investors to optimise returns without incurring unnecessary tax costs. When implemented effectively, tax loss harvesting can enhance long-term portfolio performance while ensuring compliance with local tax regulations.
How tax loss harvesting works
The process of tax loss harvesting can be broken into three main steps:
1. Sell underperforming assets
When an asset in your portfolio loses value, shows no clear signs of recovery, or no longer aligns with its original investment rationale, it may be the right time to consider selling it. For example:
- You purchased shares in a company for £10,000, but they are now valued at £6,000. By selling them, you register a loss of £4,000.
Although selling at a loss may seem counterintuitive, it can help protect your portfolio while creating opportunities for future tax savings.
2. Offset capital gains
Capital losses can be used to offset capital gains from profitable investments. For instance:
- If another investment generated £6,000 in gains, the £4,000 loss could reduce the taxable gain to £2,000.
In many jurisdictions, if your losses exceed your gains, the remaining losses can be used to offset a portion of your ordinary income or carried forward to future tax years.
3. Maintain portfolio exposure
To ensure your overall investment strategy remains on track, you can reinvest in similar assets after selling those with poor performance. However, this must be done carefully to comply with tax regulations and avoid violations, such as the wash-sale rules .
Wash-sale rules, enforced in many countries, prevent you from claiming a tax loss if you repurchase the same asset or a "substantially identical" one within a specified timeframe (e.g., 30 days in the United States). To navigate these restrictions, an alternative approach is to invest in a different but related asset, such as an exchange-traded fund (ETF) that tracks the same sector or market. This allows you to maintain similar market exposure while adhering to tax regulations.
Source: U.S Bank
Key benefits of tax loss harvesting
Tax loss harvesting can be a powerful tool to enhance your investment strategy by reducing tax burdens and improving portfolio performance. But what exactly are the key benefits of this approach? Let’s explore how it can help you stay on track with your long-term financial goals.
Lower your tax liability
One of the main advantages of tax loss harvesting is lowering the amount of tax owed on capital gains. By selling underperforming assets at a loss, you can offset taxable profits and keep more of your returns invested. If your losses exceed your gains, some jurisdictions allow you to carry them forward to reduce future tax bills.
Improve portfolio efficiency
This strategy provides an opportunity to rebalance your portfolio by selling weak-performing assets and reallocating funds to stronger investments. It ensures your portfolio remains aligned with your financial goals while maintaining exposure to the market.
Flexibility in tax planning
Excess losses can often be carried forward to offset gains in future years, offering long-term tax efficiency. It is particularly useful in years when your investments perform well, allowing you to manage tax obligations more effectively over time.
Key considerations for tax loss harvesting
While tax loss harvesting can be an effective tool, it’s important to be aware of certain limitations and rules that may impact its effectiveness.
Regulatory rules differ by country
Tax laws vary across jurisdictions, with different regulations governing how and when tax loss harvesting can be applied. For instance, in the United States, the wash-sale rule prevents investors from repurchasing the same or a substantially identical security within 30 days of selling it at a loss. Other countries may have different restrictions or exemptions, so consulting a tax professional is always advisable to ensure compliance.
Unique considerations for cryptocurrencies
Cryptocurrencies have varied tax treatments across Europe, with important differences between countries. Currently, the absence of unified rules on wash sales allows investors to sell assets at a loss and immediately repurchase them for tax purposes — something that would not be permitted for stocks and other traditional assets.
According to the study Tax-Loss Harvesting with Cryptocurrencies , this flexibility is greater in countries where crypto regulations are still underdeveloped. In Germany, for example, crypto profits are tax-exempt if held for more than one year, whereas in France, gains above €305 are taxed at 30%. In Spain, crypto assets are treated as taxable wealth, with progressive tax rates of up to 26%.
The study also highlights that the lack of clear rules for cryptocurrencies increases regulatory uncertainty. With the implementation of frameworks like MiCA (Markets in Crypto-Assets) , the European Union is expected to introduce more standardised regulations for crypto taxation, potentially including restrictions on immediate repurchases after a tax-loss sale.
The importance of timing
Knowing when to harvest losses is just as important as deciding which assets to sell. Selling during short-term market fluctuations without considering long-term recovery potential can lead to unnecessary losses. Instead, tax loss harvesting should be part of a broader investment strategy, ensuring that adjustments align with your financial goals rather than being purely tax-driven.
How to integrate tax loss harvesting into your strategy
To make tax loss harvesting work effectively within your investment plan, consider the following approaches:
Monitor your portfolio regularly
Keeping track of underperforming assets is essential to spot opportunities for tax loss harvesting. A structured approach — such as quarterly or annual portfolio reviews — helps ensure timely decision-making while preventing missed opportunities.
Use losses to offset high gains
In years where you generate substantial capital gains, offsetting them with realised losses can help lower your tax burden. This can be particularly useful for investors who have sold assets at a profit or those with a concentrated position in a high-performing investment.
Reinvest smartly to maintain market exposure
After selling a loss-making asset, reinvesting in similar but not identical securities can help maintain your market exposure while staying within legal limits. For example, instead of repurchasing the same stock, you might invest in an ETF that tracks the same industry or a different company in the same sector.
Stay up to date on tax laws
Tax regulations evolve, and staying informed about any changes in tax policies is crucial to maximising the benefits of tax loss harvesting. Consulting a tax professional or financial advisor can help you navigate complex rules and optimise your investment approach.
Why tax loss harvesting matters for long-term wealth building
Effective tax management is a key part of wealth building, with tax loss harvesting being crucial to maximising long-term returns. By strategically managing losses, investors can:
- Reduce the impact of taxes on investment gains, helping to preserve wealth.
- Adapt to changing market conditions while minimising unnecessary tax burdens.
- Stay focused on long-term financial goals improving portfolio efficiency and reinvesting strategically.
Whether investing in stocks, cryptocurrencies, or other assets, tax loss harvesting can be a powerful tool in improving after-tax returns and keeping your financial strategy on track.
Final thoughts
Tax loss harvesting helps investors reduce tax liabilities, improve portfolio efficiency, and maintain long-term investment growth. Selling underperforming assets, offsetting gains, and reinvesting to preserve market exposure allows you to optimise your after-tax returns.
However, it's important to execute tax loss harvesting with care, considering factors like timing, regulatory rules, and asset-specific considerations. Mistakes such as violating wash-sale rules or selling during temporary market dips can limit the benefits. Staying updated on tax laws and regularly reviewing your portfolio are key to maximising the strategy's effectiveness.
At SwissBorg, we empower investors with both the tools and knowledge needed to implement strategies like tax loss harvesting successfully. Our platform offers innovative investment tools and educational resources to help you make informed decisions and achieve your financial goals.
