Completed tax loss harvesting
I have a 5% allocation to the healthcare sector. This is currently divided into 2 ETFs: IHI (iShares DJ Healthcare Devices) and IHF (iShares DJ Healthcare Providers).
Shares of IHF have fallen quite a bit since the beginning of the year. Last month, I noticed that part of it could be tax loss harvested.
For those not familiar with the term, tax loss harvesting is a tax management strategy to defer taxes. The idea is to sell the losing stock or ETF, thereby claiming a capital loss on the tax return in the year it is sold.
To avoid being out of the market, you can buy a replacement ETF, which could perform similarly (but not substantially identical ) to the ETF sold, and hold it in the meantime. After waiting for 30 days, you can exchange back to the original ETF if desired. The wait-out period of 30 days is to avoid triggering the wash sale rules. (For more information, the reader is referred to the Fairmark.com website.)
Obviously, when you finally liquidate the position, you will still have to pay the tax bill; but using the strategy above, you get to use the deferred tax dollars for investing or other use. Furthermore, if you do not liquidate the position and pass it on to your heirs, then the tax is avoided altogether since your heirs would get a step-up basis on the day that you pass away.
Anyway, my tax loss harvesting replacement ETF for IHF was PTJ, the Powershares Dynamic Healthcare Services ETF. Last month, I sold shares of IHF for PTJ; and yesterday, I completed the round trip tax loss harvesting procedure; selling PTJ back for IHF. I will get to claim the capital loss in my tax return for 2008.
Stumble it!
