What is tax-loss harvesting used for in wealth management?

What is tax-loss harvesting used for in wealth management?

• A. To generate income for the client
• B. To offset capital gains taxes
• C. To increase stock holdings
• D. To improve cash flow

Answer: (B)

Tax-loss harvesting is a strategy utilized in wealth management primarily to offset capital gains taxes. This technique involves selling investments that have incurred losses in order to offset gains that have been realized from other investments. By doing so, an investor can lower their overall taxable income, reducing the capital gains taxes owed to the government. When a client sells an asset at a loss, that loss can be applied to the capital gains realized from the sale of other profitable assets within the same tax year. If the losses exceed the gains, the investor may be able to use the excess losses to offset ordinary income up to a certain limit, translating into significant tax savings. This approach allows clients to manage their tax liabilities effectively while keeping their overall investment strategy intact. The remaining capital can then be reinvested or held, supporting the client’s financial objectives without drastically altering the composition of their portfolio. Thus, the purpose of tax-loss harvesting aligns closely with minimizing tax liabilities rather than generating income, increasing stock holdings, or improving cash flow.

Tax-loss harvesting is a strategy utilized in wealth management primarily to offset capital gains taxes. This technique involves selling investments that have incurred losses in order to offset gains that have been realized from other investments. By doing so, an investor can lower their overall taxable income, reducing the capital gains taxes owed to the government.

When a client sells an asset at a loss, that loss can be applied to the capital gains realized from the sale of other profitable assets within the same tax year. If the losses exceed the gains, the investor may be able to use the excess losses to offset ordinary income up to a certain limit, translating into significant tax savings.

This approach allows clients to manage their tax liabilities effectively while keeping their overall investment strategy intact. The remaining capital can then be reinvested or held, supporting the client’s financial objectives without drastically altering the composition of their portfolio. Thus, the purpose of tax-loss harvesting aligns closely with minimizing tax liabilities rather than generating income, increasing stock holdings, or improving cash flow.