5 Things To Know About Tax-Loss Harvesting
Posted March 30, 2022
Posted March 30, 2022
Timing is everything, and if you time it right, tax-loss harvesting could help you offset your short and long-term capital gains taxes. To know if tax-loss harvesting is a savvy financial move for you, there are a few things you will need to know.
Tax-loss harvesting is the timely selling of an asset that is losing money to offset your capital gains taxes. “The result is that you only pay taxes on your net profit or the amount you’ve gained minus the amount you lost, reducing your tax bill.”
As an investor, you will be able to take the profits from this sale, purchase different investments that will grow over time, and then offset those costs down the road by selling future losses. Therefore, creating a cycle of tax-loss harvesting and tax savings.
Wondering what capital gains taxes are? In short, a capital gains tax is a tax on the profit realized on the sale of a non-inventory asset such as stocks, bonds, precious metals, real estate, and property.
Typically, investors will take advantage of tax-loss harvesting by the end of the year to sell an underperforming asset and help offset realized (already sold) capital gains taxes. However, it can be used at any point in the year until December 31st.
Tax-loss harvesting can be a valuable tool to reduce your overall taxes. Although it cannot restore the value of the underperforming asset, it can lighten the blow to your portfolio. When used correctly, tax-loss harvesting can help you realize significant tax savings.
There is a $3,000 limit on capital losses that can be deducted annually from your ordinary income (think of it as a deductible IRA contribution). However, there is no limit to capital losses that can be accrued and used to offset future capital gains.
It is also important to note that short-term losses will be used to offset short-term capital gains. The same is true for long-term capital gains taxes; long-term losses will be used to offset long-term capital gains taxes. If there are remaining short-term losses, they are used to offset long-term gains, and any additional long-term losses are then used to offset any remaining short-term gains. If there are excess losses at the end of the year, at that point, they can be carried forward to the next year in perpetuity.
If you choose to employ a tax-loss harvesting strategy, you must know the “wash-sale rule.” This rule is imposed by the IRS and requires an investor to wait 30 days before purchasing an asset “substantially identical” to the asset sold at a loss. If you do not follow the “wash-sale rule,” the funds you acquired through tax-loss harvesting cannot be used to offset capital gains.
If you’re considering tax-loss harvesting or need help rebalancing your portfolio after tax-loss harvesting, the Thayer Financial team can help.
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