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5 Things To Know About Tax-Loss Harvesting

Posted March 30, 2022

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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.

What is Tax-Loss Harvesting?

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.

When Is Tax-Loss Harvesting Useful?

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.

Why Is Tax-Loss Harvesting Useful?

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.

Is There a Limit to How Much Tax-Loss Harvesting Can Be Used Annually?

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.

Forgive my terrible drawing, but this is the order of operations for netting gains and losses

How Do I Maintain My Portfolio?

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.

How Can Thayer Financial Help?

If you’re considering tax-loss harvesting or need help rebalancing your portfolio after tax-loss harvesting, the Thayer Financial team can help.

As fiduciaries, we always work in your best interest. We sell zero products and receive zero commissions— we only do better when you do better. If you are looking for ways to save money, boost your after-tax return and meet your financial goals, make an appointment with the team at Thayer Financial.

Thayer Financial, L.L.C. (“Thayer Financial”) is a registered investment adviser offering advisory services in the States of North Carolina, Tennessee, Texas and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This website’s presence on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Thayer Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or according to an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Thayer Financial, L.L.C., unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

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