What is tax loss harvesting?

Definition and Example of Tax Loss Harvesting

Tax loss harvesting is a strategy for investors to take advantage of capital losses on their investments to offset capital gains realized on other investments.

How Tax Loss Harvesting Works

Tax loss harvesting involves offsetting capital gains with capital losses so that there is no tax liability on capital gains. Investors may sell some securities at a loss for this purpose when they have substantial gains. Losses can offset ordinary income up to $3,000 when gains exceed losses. Any losses greater than the $3,000 limit can be carried over to future tax years.

What This Means for Individual Investors

Tax loss harvesting can be valuable for someone investing in taxable brokerage accounts, as a means to reduce or eliminate capital gains or lower ordinary taxable income. This strategy is not suitable for tax-deferred accounts like 401(k) accounts or IRA accounts, as the original investment and gains are already growing tax-free in those accounts.

Will I Have to Pay Capital Gains Tax?

You will only pay capital gains tax on “net profits,” which is your profits minus your losses. You can use a capital loss to offset capital gain if the gains exceed the losses. You can reduce taxable income by $3,000 or total net losses if losses exceed gains during the tax year. You can reduce taxable income by up to $1,500 in losses if you are married and file separately.

Investors can carry over and apply any unused losses to future tax years if net losses exceed $3,000.

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Source: https://www.thebalancemoney.com/tax-loss-harvesting-2466541

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