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What is Tax Loss Harvesting & How Can You Benefit?

Tax loss harvesting is a practice of offsetting capital gains taxes by selling investments at a loss and using the losses to reduce taxable income. When done strategically, tax loss harvesting can help investors save money on taxes. In this blog post, we will discuss how to maximize your returns through tax loss harvesting. 

TAX-LOSS HARVESTING • TAXES • CAPITAL GAINS

How does tax-loss harvesting work? 

Tax loss harvesting works by recognizing losses on investments that have decreased in value due to market forces or other factors. These losses can be used to offset any taxable gains made during the year. This means that you are able to reduce your taxable income and pay less in taxes.

Let’s look at the example below. In this case, an investor has two investments, A & B, with one in a loss position and one having a gain. The investor is able to take $25,000 in losses by selling investment B that both offset capital gains on investment A as well as reduce his ordinary income by $3,000 with additional losses leftover for future gains in their portfolio. In this case, it creates $8,050 in tax savings and the potential for future additional tax savings with the $3,000 in additional losses rolled forward to offset future capital gains. 

Things to consider before tax-loss harvesting a portfolio

  • Tax-loss harvesting can only be utilized in taxable accounts not in non-taxable accounts like 401(k)’s and IRA’s.
  •  Long-term losses are first applied to long term gains and short-term losses to short-term gains. If there are additional losses in either of these categories, they can be applied to gains of either type.
  • It’s important to ensure that you don’t trigger the IRS wash sale rule which disallows taxpayers from claiming a capital gain or loss if they own “substantially similar” security within 30 days before or after the sale. In this case the loss is not allowed.  

 

It is also important for investors to use caution when engaging in tax-loss harvesting as there are specific restrictions on how much one can deduct each year as well as limits on how long one may carry forward their losses into future years without incurring additional taxes or penalties. For 2023, if an investor doesn’t have gains to offset the losses they are allowed to take a $3,000 deduction to ordinary income. When taking losses, investors should be aware of what type of costs associated with selling investments such as transaction fees and commissions which may lower overall profits if not taken into account when performing your calculations.

Tax-loss harvesting is an incredibly effective way for investors to save money on taxes while still being able to pursue their financial goals and objectives. If done correctly and strategically, tax-loss harvesting has the potential to help savvy investors decrease taxes and increase their overall returns over time.

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