What is Tax-Loss Harvesting?
Tax-loss harvesting is a portfolio management technique where you sell an investment at a loss to offset gains you’ve realized. Tax-loss harvesting reduces your overall tax burden by reducing your net capital gain. This strategy is particularly beneficial for offsetting short-term capital gains, which are taxed at the federal income tax rate and at a higher rate than long-term capital gains.
Tax-loss harvesting is one of the critical tax optimization strategies we use in our wealth management services. Because taxes can significantly reduce your portfolio return, we aim to optimize your portfolio for tax purposes.Learn More
What To Expect
When you sell an asset for a gain in a taxable brokerage account, you’re likely to be subject to capital gains taxes. Assets held for less than one year are considered short-term capital gains and are taxed at your normal income tax rate. Assets held for more than one year are taxed at long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income. (Rates are set by the IRS and are subject to change.)
But capital gains can be offset by capital losses, which are the result of selling an asset at a loss. In fact, not only can you offset capital gains, but the IRS allows you to deduct up to $3,000 in net capital losses — in other words, your capital losses exceed your capital gains.
Tax-loss harvesting is a strategy to intentionally create a capital loss to offset a capital gain. For example, let’s say you sold a security for a capital gain. You might sell another security at a loss to turn an unrealized loss into a realized loss. Doing so would reduce your net capital gains, and therefore, reduce the capital gains taxes you’ll owe.
You may then use the proceeds of the sale to reinvest in a similar security, but there’s a catch. The federal government’s wash sale rule prevents investors from selling a security and then buying a new “substantially identical” security within 30 days. However, you can either reinvest those proceeds into another security that isn’t considered substantially identical or simply wait over 30 days to purchase a substantially identical security.
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