What is Tax Loss Harvesting?
Tax loss harvesting is an investment strategy that involves selling securities at a loss to offset capital gains taxes on other investments. This method helps investors minimize their tax liability by strategically realizing losses within their investment portfolio. When an investor sells a losing investment, they can use that loss to counterbalance gains from other profitable investments, effectively reducing the total taxable income.
The process typically involves identifying underperforming assets in your portfolio and selling them at a loss before the end of the tax year. The realized losses can then be used to offset capital gains realized during that year. If the losses exceed the gains, up to $3,000 of the excess can be deducted against other income, such as wages or salaries, with any additional losses carried forward to future tax years.
It's important to note the "wash sale rule," which prevents investors from claiming a tax deduction if they buy a substantially identical security within 30 days before or after the sale. Therefore, careful planning is required to ensure compliance while still benefiting from losses.
Overall, tax loss harvesting can be an effective strategy to enhance after-tax returns and improve overall investment performance. Investors should consult with a tax advisor to tailor this strategy to their individual financial situation.