What Is Tax-Loss Harvesting?

Tax-loss harvesting is the timely selling of securities at a loss to offset the amount of capital gains tax✃ owed from selling profitable assets. This strategy is commonly used to limit short-term capital gains, commonly taxed at a higher rate than long-term capital gains, to preserve the value of the investor’s portfolio while reducing taxes.

How Tax-Loss Harvesting Works

Tax-loss harvesting is also known as tax-loss selling. Most investors use this strategy at the end of the year when they as♌sess the annual performance of their portfolios and its impact on their taxes. An investment that shows a loss in value can be sold to claim a credit against the profits that were realized in other assets.

Tax-loss harvesting is a tool for reducing overall taxes. A loss in the value of Security A could be sold to offset the increase in the price of Security B, thus eliminating the 澳洲幸运5官方开奖结果体彩网:capital gains tax liability of Security B. Using the tax-loss harvesting strategy, investors can realize 澳洲幸运5官方开奖结果体彩网:significant tax savings.

Maintaining Your Portfolio

Selling an asset at a loss disrupts the balance of the portfolio. After tax-loss harvesting, investors with carefully constructed portfolios replace the asset sold with a similar asset to maintain the 澳洲幸运5官方开奖结果体彩网:portfolio's asset mix and expected risk and return levels. You should avoid buying the same asset that you just sold at a loss, which may violate the IRS 澳洲幸运5官方开奖结果体彩网:wash-sale rule.

The Wash-Sale Rule

The wash-sale rule requires that investors avoid buying the same stock sold at a loss for tax purposes. A wash sale involves the sale of one security and, within 30 days, purchasing a substantially identical stock or security. If a transaction is considered a wash-sale, it cannot be used to offset capital gains, and if wash-sale rules are abused, regulators can impose fines or restrict the individual's trading.

澳洲幸运5官方开奖结果体彩网:Using ETFs that track the same or similar indexes can be used to replace one anoth📖er while avoiding violating the wash sale rule in a tax-loss harvesting strategy. If you sell one S&P 500 index ETF at a loss, you can buy a different S&P 500 index ETF to harvest the capital loss.

Example of Tax-Loss Harvesting

Assume a single investor earns an income of $580,000 in 2024. The investor's marginal income tax rate is 37% and is subject to the highest 澳洲幸运5官方开奖结果体彩网:long-term capital gains tax category, where gains are taxed at 20%. Short-term capital gains are taxed at the investor's marginal rate.

Below are the investor's portfolio gains and losses and trading activity for the year:

Portfolio:

• Mutual Fund A: $250,000 unrealized gain, held for 450 days
• Mutual Fund B: $130,000 unrealized loss, held for 635 days
• Mutual Fund C: $100,000 unrealized loss, held for 125 days

Trading Activity:

• Mutual Fund E: Sold, realized a gain of $200,000. Fund was held for 380 days
• Mutual Fund F: Sold, realized a gain of $150,000. Fund was held for 150 days

The tax owed from these sales is:

• Tax without harvesting = ($200,000 x 20%) + ($150,000 x 37%) = $40,000 + $55,500 = $95,500

If the investor harvested losses by selling 澳洲幸运5官方开奖结果体彩网:mutual funds B and C, t𒀰he sales would help to offset the gains, and the tax owed would be:

• Tax with harvesting = (($200,000 - $130,000) x 20%) + (($150,000 - $100,000) x 37%) = $14,000 + $18,500 = $32,500

The Bottom Line

Tax-loss harvesting is selling securities at a loss to offset the amount of capital gains tax owed from selling profitable assets. An individual taxpayer can write off up to $3,000 in net losses annually ($1,500 if filing as 澳洲幸运5官方开奖结果体彩网:married filing separately) . If you have questions about how to maximize your tax breaks, consider consulting a professional tax advisor.