Tax Loss Harvesting

Tax Loss Harvesting

May 13, 2024

There is an old adage in investing that almost everyone has heard:  “Buy low and sell high.”  But is there ever an instance where you would do the opposite?  Obviously, the goal is always to make money on your investments, however sometimes it can make sense to sell something at a loss and receive the tax benefits.  We will briefly discuss the topic of Tax Loss Harvesting here.

Tax loss harvesting is simply the act of selling an asset such as a stock at a lower price than you paid for it.  Although this is clearly not a good strategy for long term wealth accumulation, it can be helpful in the short-term for the tax benefits.  This is only relevant for taxable investment accounts, (not retirement accounts). 

When you sell something at a loss, you are allowed to deduct that loss against the amount owed on your taxes for the year of the loss.  You need to be mindful of avoiding a wash sale, which means that after you sell an asset at a loss you cannot purchase the same asset again within 30 days.  Assuming you follow this, you can become eligible to receive the tax benefits.  There are several nice things that go along with the tax benefits.  First, you are eligible to use the loss to offset any other capital gains that you have in the same calendar year.  Second, if you do not have a gain to offset, you are allowed to use up to $3,000 and to your ordinary income.  This is a very nice feature since your ordinary income tax rate is typically higher than your capital gains tax rate.  Lastly, if you have any leftover loss (meaning no capital gains to offset and you still have a leftover loss after offsetting $3,000 of income, you are able carryover the remainder into future tax years.  Effectively the loss never goes away until you have fully utilized it.  Again, this is not a long-term investment strategy, but it can be helpful in the short term to lower your tax liability.  Think of it as a silver lining when an investment does not go the way that you intended. 

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.