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What is Tax-Loss Harvesting & How Can it Benefit You?

What is Tax-Loss Harvesting & How Can it Benefit You?

February 22, 2023

A Silver Lining for Bad Investments

There is inherent risk in investing and not every investment is a winner. Fortunately, come tax time, there can be a silver lining in the form of tax-loss harvesting. Tax-loss harvesting entails taking capital losses - selling securities for less than what you initially paid for them - to offset any capital gains you may have. While this doesn't get rid of your losses, it can help you manage your tax liability.

Keep in mind, this article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax or accounting professionals before implementing any tax strategy that may involve tax-loss harvesting.

How Tax-Loss Harvesting Works

You may deduct up to $3,000 of capital losses in excess of capital gains for your federal tax return each year; your tax or accounting professional can speak to how capital losses are treated on your state tax return. Any remaining capital losses above that amount can be carried forward to potentially offset capital gains in following years. By taking losses and carrying over the excess losses into the future, you may be able to manage some long-term and short-term capital gains.

Wash-Sale Rule

You must watch out for the Internal Revenue Service's "wash-sale" rule. You can't claim a loss on a security if you buy the same or a "substantially identical" security within 30 days before or after the sale - the window is even 61 days in some instances. In other words, you can't just sell a security to rack up a capital loss and then quickly replace it.

Potential Drawbacks

You may not wish to sell assets in a portfolio for tax-loss harvesting, especially if it has been built for the long-term. Additionally, you can only practice tax-loss harvesting in taxable accounts; tax-advantaged accounts are ineligible for this strategy.

Year-Round Strategy

As previously mentioned, while some investors get to thinking about tax-loss harvesting as the year comes to a close, it's a practice that you can consider all year round.

If you want to know more about tax-loss harvesting and how you could benefit, contact our office today.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2023 FMG Suite.