Tax Loss Harvesting
Tax loss harvesting allows investors to sell securities at a loss and use the losses to offset gains from other investments, reducing their taxable income.
Commonly referred to as tax loss harvesting strategy.
Do I Qualify for Tax Loss Harvesting?
If you have invested in securities, you can use tax loss harvesting to sell securities that are performing at a loss and use those losses to offset capital gains taxes you owe on other profitable investments.
2022 Tax Loss Harvesting Details
What Is Tax Loss Harvesting?
Tax loss harvesting is the practice of selling a security (e.g., stock, bond, option) that has experienced a loss in order to deduct those losses on your taxes. By realizing, or “harvesting,” a loss, you can offset some or all of the capital gains taxes you might owe on other profitable investments.
How Does Tax Loss Harvesting Work?
You can only use tax loss harvesting on investments that are held in taxable accounts. The IRS does not tax growth on investments in accounts such as 401(k)s, 403(b)s, IRAs and 529 plans, so there is no way to benefit from selling those investments at a loss.
The tax loss harvesting strategy tends to be most beneficial for investors in higher tax brackets — the higher your income tax bracket, the greater the potential for savings. It works best for investments in individual stocks, actively managed funds and exchange-traded funds.
The amount of capital gains taxes you pay depends on how long you’ve owned the investment:
• Long-term capital gains tax rates apply when you sell an investment that you’ve held for one year or more. The tax rate will be 0%, 15% or 20% depending on your income tax bracket.
• Short-term capital gains tax rates apply when you sell an investment you’ve held for less than one year. The tax rate will be the same as your ordinary income tax rate.
Is Tax Loss Harvesting Worth It?
Tax loss harvesting can help you minimize what you pay in capital gains taxes by reducing the amount you claim as income. You don’t have to have a large portfolio to benefit from harvesting regularly. Even if you don’t have investment gains to minimize, you can use losses to offset the taxes you pay on ordinary income, too.
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• Reduces capital gain or ordinary gain on the sale of securities
• Locks in a loss with no guarantee that the security will not go up in price in the next 30 days from the date of sale
• Wash sale rule applies (i.e., you will not be able to buy the same security within 30 days of the sale)
Assumptions When Taking the Tax Loss Harvesting
• Savings range limits depend on your income/tax bracket.
• You will not purchase the same security within the wash sale time frame (30 days from the sale of the security).
• Qualified Opportunity Zone (Individual)
Requirements to Claim the Tax Loss Harvesting
• You must have a security that is currently trading at a loss from its purchase price.
• Your gain from selling securities must be at least equal to the amount of your loss from harvesting in order for the strategy to be beneficial.
Business Entities That Can Claim the Tax Loss Harvesting
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.