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By David GordonDirector, Eaton Vance Advisor Institute

As advisors and clients await clarity on the Biden administration's proposed capital gains tax increases, it is a good time to remind ourselves of an often-overlooked opportunity — tax-loss harvesting — and explain it to clients. Regardless of what Congress ultimately decides, the ability to reduce taxable capital gains with unused capital losses seems likely to remain in place, as neither Congress nor the White House has proposed eliminating this capital gains/losses offset.

So how can advisors help clients understand this benefit and see the silver lining of potential tax increases?

Start by explaining that if a position in a client's portfolio experiences what is likely to be a temporary loss in value, for example, the proceeds of a loss sale could be immediately reinvested in a similar security that maintains exposure to the asset class, rather than leaving the proceeds of the sale in cash. Imagine selling one automaker and reinvesting the proceeds in a different automaker, or selling one fast food chain and buying another. Examples like these can help clients understand that realized capital losses need not be permanent losses in portfolio value.

The After-Tax Advisor® can suggest that a tax loss is similar to a store coupon that reduces the amount of money you spend when you shop — only this is a "coupon" from the IRS that lets clients pay less in capital gains tax. The After-Tax Advisor further explains that if capital gains tax rates rise for a particular client, then any accumulated unused losses become more valuable because they can reduce the amount of capital gains exposed to these new higher rates. And because tax losses can be harvested almost anytime, you could help clients see the wisdom of realizing capital losses now in anticipation of offsetting future realized capital gains.

Bottom line: Losses that offset more expensive gains are, themselves, more valuable — the silver lining of tax increases.

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