Tax-loss harvesting is a technique that helps investors reduce their tax bill by strategically selling investments that have lost value. When you sell an investment for less than what you originally paid, the difference is considered a capital loss. These losses can be used to offset any capital gains you've made from selling other investments at a profit, potentially lowering the amount of taxes you owe on those gains.
Here’s how it works in practice: Let’s say you sold one stock and made a $10,000 profit. You also have another stock sitting at a $7,000 loss. By selling the losing stock, you can subtract that $7,000 loss from your $10,000 gain, meaning you’ll only pay taxes on a $3,000 net gain. If your losses exceed your gains, you can apply up to $3,000 of the leftover losses to reduce your ordinary income, and any additional losses can be carried over to future tax years.
One key rule to keep in mind is the wash-sale rule. This IRS rule prevents you from claiming a tax loss if you buy the same or a substantially identical investment within 30 days before or after the sale. To stay compliant, many investors purchase a similar—but not identical—investment to maintain market exposure without triggering the rule.
Tax-loss harvesting can be a valuable year-end strategy, but it should align with your overall investment plan and risk tolerance—not just for tax reasons alone. It’s wise to consult with a financial professional to ensure it’s done correctly and fits within your broader financial goals.
For more insights on tax strategies and wealth management, visit www.isewealthstrategies.com.