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Investments

Keeping More Money in Your Pocket: Tax-Loss Harvesting

Keeping More Money in Your Pocket: Tax-Loss Harvesting

“Whatever you tax, you get less of” ― Alan Greenspan

4 min read

Tax-Loss Harvesting: Reducing Your Tax Liability

Keeping More Money in Your Pocket: Tax-Loss Harvesting

“Whatever you tax, you get less of” ― Alan Greenspan

4 min read

Tax-loss harvesting is a sophisticated strategy that you can use to optimise your investment portfolio(s) and reduce your tax liabilities. Today, we are looking into the intricacies of this strategy that you may not have heard before!

Read on to discover the upsides, downsides and how you can implement this technique to enhance your overall financial wellbeing.

Tax-Loss Harvesting: The Basics

Tax-loss harvesting is a proactive investment strategy designed to mitigate tax liabilities and enhance overall portfolio performance. The process hinges on the strategic selling of investments that have incurred losses, creating an opportunity to offset capital gains and, consequently, lower your taxable income. Seems simple enough, right?

To execute tax-loss harvesting effectively, it is important to closely examine your investment portfolio. This involves identifying specific assets that have experienced a decline in value. These underperforming investments become valuable tools in the tax-loss harvesting toolkit, as their losses can be strategically realised to counterbalance any capital gains within the same tax year.

The key principle is to turn temporary setbacks into long-term advantages. By intentionally selling assets that are currently at a loss, you create a deliberate taxable event. This loss can then be used to offset capital gains, either reducing or entirely eliminating the associated tax obligation. This approach not only minimises the immediate tax impact but can also allow for for improved tax efficiency and potential long-term capital growth.

With regards to which assets to sell, it’s surely just any that have made a loss? Well, whilst that could be the case, it’s actually prudent to identify assets with unrealised losses that align with the your overall financial goals and risk tolerance. Selecting the investments to sell that ensures your investment strategy can remain on track, or making adjustments as required. 

Additionally, the process must adhere to any regulatory guidelines where you are based. Some jurisdictions have laws in place to prevent manipulation of tax benefits such as selling an asset at a loss and buying it back immediately or shortly afterwards.

What is Good About it?

The benefits of tax-loss harvesting extend beyond just a reduction in taxable income; it is a strategic financial tool with many advantages that can significantly impact your overall wealth management plan(s).

  1. Minimising Taxes: Naturally, an immediate reduction in your taxable income is one of the main benefits to tax-loss harvesting. Minimising taxes through this strategy translates to more disposable income that can be redirected towards further investments, other financial goals or a nice holiday.

  2. Balancing Portfolios: An often overlooked benefit of tax-loss harvesting is its role in portfolio rebalancing. In your usual portfolio, you should aim to maintain a specific asset allocation aligned with your financial objectives and risk tolerance. However, market fluctuations can skew this balance. Therefore, tax-loss harvesting allows for strategic selling of underperforming assets without incurring substantial tax consequences. If done correctly, you are able to keep your portfolio in line with your risk tolerance and goals whilst reducing your tax liability!

  3. Creating Tax Efficiency: The cumulative effect of consistent tax-loss harvesting is increased tax efficiency over the long term. As losses are strategically realised, they can be used to offset future capital gains, providing a shield against unnecessary tax liabilities. This enhanced tax efficiency ensures that a larger portion of your returns contributes to growth or income rather than being diverted towards taxes. Over time, this can result in a more streamlined and effective approach to wealth accumulation.

Are There Any Downsides?

Of course, nothing is without it’s disadvantages! Here are some of the key ones that apply to tax-loss harvesting:

Complexity and Monitoring Requirements

Tax-loss harvesting involves a thorough analysis of an investment portfolio to identify opportunities for realising losses. This process can be complex, requiring continuous monitoring of market conditions and individual securities. You need to stay informed about changes in the value of your holdings and make strategic decisions to optimise tax outcomes. The complexity of tracking and managing multiple investments can be overwhelming for some!

Transaction Costs and Fees

Engaging in tax-loss harvesting often involves selling and buying securities, which can trigger transaction costs and fees. These expenses have the potential to erode the tax benefits gained from harvesting losses. Additionally, if you’re not careful, frequent trading may lead to increased transaction fees, impacting the overall returns of the portfolio. It’s crucial to weigh the potential tax advantages against the costs associated with executing the necessary trades. Ensure you speak with your Patterson Mills Financial Adviser before making any decisions.

Potential Market Timing Risks

Tax-loss harvesting requires selling investments at a loss, and the decision of when to execute these sales introduces potential market timing risks. If you sell during a market downturn to realise losses, they risk missing out on a subsequent market upturn. The challenge is to balance the tax benefits of harvesting losses with the uncertainty of market movements. Attempting to time the market can be unpredictable, and decisions made solely for tax purposes may not align with your broader investment strategy.

Can You Benefit?

If you are able to identify losses to offset your gains whilst adhering to applicable regulations and ensuring your investment strategy remains on plan, you can!

If it sounds like the monitoring required, careful selection of which assets to sell and adherance to applicable regulations could be too time consuming for you, it is time to get in touch with Patterson Mills and book your initial, no-cost and no-obligation meeting. Your investments will thank you and you too will be pleased that you have the peace of mind you deserve.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all information within this article has been prepared for informational purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Categories
Investments

Navigating the Tax Implications of Investing in Switzerland

Navigating the Tax Implications of Investing in Switzerland

“The road to a better place is not a straight line, but a journey well worth the effort” – Zig Ziglar

2 min read

Navigating the Tax Implications of Investing in Switzerland

“The road to a better place is not a straight line, but a journey well worth the effort” – Zig Ziglar

2 min read

Switzerland, renowned for its financial stability and picturesque landscapes, also boasts a unique tax landscape that significantly impacts investors. As you embark on your investment journey, understanding the tax implications is crucial to maximizing returns and remaining compliance. In this article, I unravel the key tax considerations associated with investing in Switzerland.

Capital Gains Tax: The Sweet Exemption

Unlike many countries, Switzerland does not impose capital gains tax on individuals. Profits earned from the sale of assets such as stocks, bonds, and real estate are generally tax-free. However, this does not apply to professional traders, whose trading activities may be deemed taxable income.

Wealth Tax: The Weight of Prosperity

One notable feature of Switzerland’s tax system is the wealth tax. Depending on the canton (region) you reside in, you may be subject to an annual tax based on your net wealth, which includes your investments, real estate, and other assets. The rate varies among cantons, making it essential to research and plan your investments accordingly.

Dividend and Interest Income: Variable Tax Treatment

Dividend income from Swiss companies is typically subject to a lower tax rate due to the participation exemption, which aims to encourage investment. However, this exemption may not apply if you hold a significant stake in the company or if the dividend is considered interest-like. Interest income, on the other hand, is usually subject to standard income tax rates.

International Tax Agreements: Double Taxation Relief

Switzerland has entered into numerous double taxation agreements (DTAs) with other countries to prevent investors from being taxed twice on the same income. These agreements outline rules for determining which country has the primary right to tax specific types of income, offering relief to investors and promoting cross-border investments.

Third Pillar: Retirement Savings with Tax Benefits

For Swiss residents, the Third Pillar is a government-sponsored retirement savings scheme. Contributions to this pillar are tax-deductible, incentivizing individuals to save for their retirement while enjoying immediate tax benefits. However, withdrawals during retirement are subject to income tax, albeit typically at a lower rate. The amount you can contribute to your Third Pillar is limited each year and this limit is subject to change.

Estate and Inheritance Tax: An Important Consideration

When investing in Switzerland, it’s essential to consider the potential impact of estate and inheritance taxes on your assets. These taxes vary by canton and can significantly affect the distribution of your wealth to heirs or beneficiaries.

Navigating Towards Success

Switzerland’s tax landscape for investors is a blend of unique advantages and complexities. While the absence of capital gains tax and the participation exemption on dividends offer attractive benefits, wealth tax and other considerations require careful planning.

Before making any investment decisions, consulting with a professional financial advisor or tax expert who understands Swiss tax regulations is crucial. This ensures you navigate the intricate tax system effectively, optimising your investments for financial success in this captivating country.

Get in touch with us today to ensure your investments are working for you as efficiently as possible whilst remaining compliant.

Contact us now to book your initial, no-cost and no-obligation meeting. Either send us an e-mail to info@pattersonmills.ch or call us direct at +41 21 801 36 84.

Patterson Mills are not tax Advisers and thus the information provided in this article is not advice. Please contact us to discuss this article before making any financial or investment decisions.