Introduction
As dentists build wealth outside of their practices, many begin investing in brokerage accounts, real estate, or other non-retirement assets. While investment performance often gets the most attention, the tax impact of those investments is just as important. Strategies like tax loss harvesting and tax gain harvesting can help manage how and when taxes are recognized over time.
These concepts can sound technical, but they are practical tools when used carefully and in the right context.
What Is Tax Loss Harvesting?
Tax loss harvesting is the process of selling an investment at a loss in order to offset taxable gains. When an investment is sold for less than its purchase price, the loss can generally be used to offset capital gains realized during the year. If losses exceed gains, a limited amount may be used to offset ordinary income, with any remaining losses carried forward to future years.
The goal is to use losses intentionally rather than letting them sit unused in a portfolio. However, this strategy should be approached carefully. Tax rules limit how losses can be claimed, particularly if a similar investment is repurchased within a short period of time.
It is also important to ensure that any sale still aligns with your overall investment strategy and long-term financial goals.
What Is Tax Gain Harvesting?
Tax gain harvesting involves selling investments that have increased in value in order to recognize gains in a specific tax year. This strategy is sometimes used when income is lower than usual, which may result in those gains being taxed at a lower rate.
After the sale, the investment may be reinvested, which can increase the cost basis for future tax purposes. This can reduce the taxable gain on a future sale of the same or similar investment.
This strategy is not appropriate in every situation, but it can be useful in years where income is temporarily reduced or more flexibility exists in managing taxable income.
Why This Matters for Dentists
Dentists often experience changes in income over time. Associates may see income increase as they gain experience, while practice owners may have variability based on production, growth, or reinvestment into the practice.
Because of this, the timing of income and investment activity matters. In higher-income years, realized gains may result in higher tax liability. In lower-income years, there may be opportunities to recognize income at more favorable rates.
Tax harvesting strategies are most relevant in taxable investment accounts, where gains and losses are recognized in the year they occur. These accounts often complement retirement savings by providing additional flexibility and access to funds.
Practical Considerations for Dentists
For dentists, tax harvesting should be part of a broader planning strategy rather than a standalone decision. The benefit depends on your overall income, existing gains or losses, and future expectations.
Timing plays an important role. Decisions should take into account your current year income and whether you expect that income to change in the near future. Major financial events, such as buying into a practice or expanding, can also influence whether it makes sense to realize gains or losses in a given year.
It is also important to follow the applicable tax rules carefully. Certain transactions, including repurchasing substantially identical investments too quickly, can limit the ability to claim losses.
Coordination between your CPA and your financial advisor is essential to ensure these strategies are applied correctly and in a way that supports your overall financial plan.
Conclusion
Tax loss and tax gain harvesting are strategies that can help manage the timing of taxable income from investments. When used appropriately, they can improve long-term tax efficiency and provide more flexibility in financial planning.
The key is applying them thoughtfully within the context of your broader financial picture.
At Dental CPA, we work closely with dentists to align tax strategy with practice income, investment decisions, and long-term financial goals. If you have questions about how these strategies fit into your overall plan, we encourage you to schedule a consultation with our team.