Tax Loss Harvesting: Tax loss harvesting is a strategy used by investors to minimize their tax liability by strategically selling investments that have experienced a loss. The goal is to offset gains from other investments and potentially reduce the overall taxable income. This technique is commonly employed in taxable investment accounts (non-retirement accounts) and involves selling losing investments to generate capital losses.
Maximizing Tax Benefits: To maximize the tax benefits through tax loss harvesting, consider the following steps.
Identify Losses: Review your investment portfolio and identify investments that have declined in value since their purchase. These are the candidates for tax loss harvesting.
Offset Gains: Look for investments that have appreciated in value and generated capital gains. By strategically selling losing investments, you can offset these gains and potentially reduce your taxable income.
Avoid Wash Sales: The IRS has rules to prevent “wash sales,” which occur when you sell an investment to realize a loss and then buy a substantially identical investment shortly after. If this happens within 30 days before or after the sale, the loss may be disallowed for tax purposes. To avoid this, consider waiting for the 31-day window before repurchasing a similar investment.
Consider Long-term and Short-term Gains: Capital losses can be used to offset both long-term and short-term capital gains. If you have a mix of gains with different holding periods, you can strategically match losses to the appropriate gains to maximize the tax benefit.