What is Tax-Loss Harvesting?

Believe it or not, if a few of your investments dropped this year, they could come in handy. That’s because you can do something called tax-loss harvesting. This strategy allows you to use your money-losing investments to lower your tax bill. Here’s what you should know.

The Basics of Tax Loss Harvesting

Tax-loss harvesting can lower your taxes by offsetting the amount you claim as income or capital gains. You gather, or “harvest,” investments to sell at a loss, then use it to reduce the taxes you might have to pay on any gains made.

What are Capital Gains and Losses?

A capital gain is the difference between what you paid for an investment (the cost basis) and the eventual sale price. You have a capital loss if the cost basis is higher than what you paid for it. If the cost basis is lower than what you paid for it, you have a capital gain.

How it Works

If you want to try tax-loss harvesting, the process is fairly straightforward.

Tax Loss Harvesting Example

Let’s say you sell a stock for $12,300 that you paid $10,000 to purchase.

Your realized capital gain is $2,300. That gain is taxable in the year you sold it and reaped that nice chunk of cash.

Now let’s say you sold that same stock for only $9,000. That means you have a capital loss of $1,000. Let’s circle back to the gain.

If you had the $2,300 gain, you could sell an investment at a loss to offset that gain on your tax returns. 

Offsets and Carry Forward

You can also use capital losses to offset up to $3,000 of ordinary income. And, if you have more losses in a tax year than you can use, you can “carry forward” those losses to use in the future.

Do One Thing: Ask your accountant or tax preparer if tax-loss harvesting is right for you. 

This information is for educational purposes only. It is not intended to be tax, financial, or legal advice. If you have questions about tax-loss harvesting for your situation, consult a financial advisor or tax specialist.