---
title: Harvesting Losses - Doug's Quiz Corner
description: One of the benefits of tax loss harvesting is the ability for the investor to invest the funds that would have otherwise been lost to taxes.
image: http://www.wrapmanager.com/hubfs/blog-files/Tax_Loss_Harvesting_Dougs_Quiz_Corner.jpg
---

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# Harvesting Losses - Doug's Quiz Corner

Posted by [ Doug Hutchinson | CFA®, Director of Research and Trading](https://www.letsassemble.com/wealth-management-blog/author/doug-hutchinson)  
 October 13, 2015

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![](http://www.wrapmanager.com/hubfs/blog-files/Tax_Loss_Harvesting_Dougs_Quiz_Corner.jpg)Quizmaster Doug Hutchinson has come up with another great quiz that explores the effect of harvesting losses. Let’s see what the math has to say.

Good luck!

First, a definition of tax loss harvesting. **Tax Loss Harvesting** is the practice of selling a security that has experienced a loss. By realizing, or "harvesting" a loss, investors are able to offset taxes on gains. The sold security may be held in cash or replaced by a similar one (keeping in mind wash sale rules), to help maintain the optimal asset allocation. 

### Consider this scenario:

Your friend Betty bought 1,000 shares of Security A at $100 at the start of the year for a total investment of $100,000. A few months later, Security A has declined in value to $95, so Betty’s investment position in Security A is now worth $95,000. Betty is considering selling her total position in Security A and purchasing 1,000 shares of Security B which is trading at $95. She would realize a short-term capital loss of $5,000 ($100,000 cost basis of Security A - $95,000 sale proceeds of Security A = $5,000 capital loss on Security A).

Betty could apply this loss against a realized gain elsewhere in her portfolio.  Assume Betty has a short-term realized gain of $5,000 from the sale of another investment and that she has no other realized gains or losses.  Assume Betty has a combined Federal and state tax rate of 40% on short-term gains.

At the end of Year 1, Betty would reinvest her tax savings from her potential tax loss harvest by investing the amount of the tax savings in Security B.

In this sceniario, both Security A and Security B recover in value and are worth $100,000 at the end of Year 1. For illustrative purposes, let’s assume both securities have returns of 8% per year in Year 2, Year 3, and Year 4.  What is the value of Betty's position at the end of Year 4 if she harvests losses in Security A in Year 1? What is the value of her position at the end of Year 4 if she does not harvest losses in Security A in Year 1?

### Answer:

**Scenario 1: Harvest Losses in Security A:**

Start of Year 1: Betty buys Security A for $100,000   
Later in Year 1: Betty sells Security A for $95,000 and buys Security B for $95,000   
End of Year 1: Security B is worth $100,000. 

- Betty has saved $2,000 on her tax bill by using the tax loss to offset other realized gains ($5,000 x 40% = $2,000). Betty invests this $2,000 in security B so her total position is now worth $102,000.

Start of Year 2: $102,000 x 1.08 = $110,160 end of Year 2 value   
Start of Year 3: $110,160 x 1.08 = $118,972.80 end of Year 3 value   
Start of Year 4: $118,972.8 x 1.08 = $128,490.62 end of Year 4 value

**Scenario 2: Don't Harvest Losses in Security A:**

Start of Year 1: Betty buys Security A for $100,000   
Later in Year 1: Betty keeps Security A, worth $95,000   
End of Year 1: Security A is worth $100,000

Start of Year 2: $100,000 x 1.08 = $108,000 end of Year 2 value   
Start of Year 3: $108,000 x 1.08 = $116,640 end of Year 3 value   
Start of Year 4: $116,640 x 1.08 = $125,971.20 end of Year 4 value

*Scenario 1 has an end of Year 4 value of $128,490.62 versus an end of Year 4 value of $125,971.20 in scenario 2. *

**One of the benefits of tax loss harvesting is the ability for the investor to invest the funds that would have otherwise been lost to taxes.  In this scenario 1, Betty's Year 1 tax loss harvest led to an end of Year 4 position that was higher in value by $2,519.42 than scenario 2 because Betty was able to invest her tax savings in Year 1 and watch those savings compound over time.**

[Test your knowledge with another quiz from Doug's Quiz Corner!](http://www.wrapmanager.com/wealth-management-blog/the-psychology-of-gains-and-losses-dougs-quiz-corner)

If you would like to learn more about tax loss harvesting or have any other investment questions, feel free to contact WrapManager at [1-800-541-7774](tel:+18005417774) or [contact us here](http://www.wrapmanager.com/contact) to start the conversation.

---

This quiz is intended for informational and illustrative purposes only. This material is not intended to be relied on as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information presented is general information that does not take into account your individual circumstances, financial situation or needs, nor does it present a personalized recommendation to you. The information and opinions contained in this material are derived from sources deemed reliable, are not all-inclusive and are not guaranteed as to accuracy.

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