What Tax Loss Harvesting Means to You
Yet another benefit of low-cost investment services
Low-cost, automated investment firms like Betterment have many advantages. Tax loss harvesting is one of those. Problem is, most people don’t know what this is, let alone why it matters. This infographic shows you the potential benefit, and more importantly, what it could mean for your future lifestyle.
Tax deferral, not tax elimination
We try to explain things using “why does it matter to me” principle. Here’s why it matters to you – tax loss harvesting delays capital gains taxes, and that ultimately means higher returns. When you sell a security at a loss, you can offset a gain, thereby avoiding the tax for some time. Taxes are bad, so that’s a good thing. Well, sort of. Securities generally go up over time, so the tax man will come to get his, but later. That’s tax deferral, which is different from tax elimination.
So tax loss harvesting doesn’t eliminate taxes, it defers them, which always results in better returns if your investments are making money over time. Why? Taxes act like a fee that are deducted every year, and you’d rather have it all deducted at the end. We’ve shown the real life impact of fees on your life and it’s much the same with tax deferral. If you earn 10% every year, and have to pay 20% taxes on those gains, that’s the same as a 2% fee being deducted. And that’s bad. It’s especially bad when you pay a 2% fee and taxes.
Machines will do it best
We think deferring taxes is a great way to make more money over the long run. It’s also a task where machines have an unquestionable advantage compared to a human. That’s what tax loss harvesting means. And no, you should not pay extra for a human to do it worse than a machine will for free.