Tax-loss harvesting is a tax-management strategy that involves selling investments at a loss to offset capital gains. This can help reduce an investor's tax liability and improve their overall investment returns.
Profits earned from the sale of assets, such as stocks, bonds, and real estate.
Losses incurred from the sale of assets, such as stocks, bonds, and real estate.
Capital losses can be used to offset capital gains, reducing an investor's tax liability.
The IRS prohibits claiming a loss on a security if you buy the same or a "substantially identical" security within 30 days before or after the sale.
Identify investments in your portfolio that have declined in value.
Sell the investments at a loss.
Use the capital losses to offset capital gains, reducing your tax liability.
Reinvest the proceeds from the sale into similar, but not "substantially identical," investments.
Suppose an investor has $10,000 in capital gains and $5,000 in capital losses. By using tax-loss harvesting, the investor can offset the $10,000 in capital gains with the $5,000 in capital losses, reducing their tax liability.
Tax-loss harvesting may be a good option for individuals who:
The wash sale rule is an important consideration when implementing a tax-loss harvesting strategy. The wash sale rule prohibits claiming a loss on a security if you buy the same or a "substantially identical" security within 30 days before or after the sale. To avoid violating the wash sale rule, investors can reinvest the proceeds from the sale into similar, but not "substantially identical," investments.