Tax-Loss Harvesting Explained in 2 Minutes or Less
When investing during a bear market or recession, one of the smartest things you can do is utilize tax-loss harvesting. This strategy allows you to sell investments at a loss in order to offset any capital gains you may have earned elsewhere. Not only does this help improve your overall investment returns, but it can also save you money come tax time.
If you’re interested in learning more about how to tax-loss harvest, read on for a complete guide.
First, let’s take a look at what tax-loss harvesting is and how it works.
Here’s a quick rundown of what tax-loss harvesting is and how it works:
When you sell an investment for a profit, you are typically subject to capital gains taxes. However, if you sell for a loss, you can use that loss to offset taxes on capital gains.
What is tax-loss harvesting?
Specifically, tax-loss harvesting refers to selling investments at a loss to offset taxes on capital gains. This strategy can minimize your tax bill and maximize your after-tax returns.
When done correctly, tax-loss harvesting can be an extremely effective way to reduce your taxable income and boost your investment returns. However, it is important to understand the ins and outs of this strategy before implementing it in your own portfolio.
The basics of tax-loss harvesting
You incur a capital loss when you sell an investment for less than you paid. This loss can be used to offset any capital gains you may have earned from other investments.
For example, let’s say you sold an investment for a $10,000 loss. If you had a $15,000 capital gain from another investment, you would only be taxed on the $5,000 difference, saving you a significant amount in taxes.
There are a few things to keep in mind when tax-loss harvesting. First, you can only offset capital gains, not ordinary income. Second, you can only use $3,000 of capital losses to offset income in any given year.
If you have more than $3,000 in capital losses, you can carry the excess forward to offset gains in future years.
Now that we’ve covered the basics, let’s look at how to implement tax-loss harvesting in your investment strategy.
There are a few different ways to go about this. One option is to wait until the end of the year to sell any investments that have lost value. This way, you can use the losses to offset any gains you may have realized during the year.
Another approach is to sell losing investments as they occur throughout the year and reinvest the proceeds into similar investments. This can help you keep your overall investment portfolio more diversified.
No matter which approach you take, tax-loss harvesting can be a valuable tool in reducing your tax bill and improving your investment returns.