A Beginner’s Guide to Tax Loss Harvesting

ByBNW TEAM

One thing is clear: not every investment brings profits. Market downturns, political news, and inflation can lower the value of your investment. But even losing investments come with a silver lining. 

Tax loss harvesting allows investors to turn their reversal into an advantage. Wondering how it’s possible? We’ve got you covered. Here’s a simple and straightforward guide for beginners:

What is Tax Loss Harvesting?

Tax loss harvesting is a financial strategy that involves selling securities at a loss to offset profitable gains. 

So, how does tax loss harvesting work? Imagine you’re reviewing your portfolio and notice that tech stocks have dropped in value while your healthcare stocks have risen sharply. To rebalance your portfolio, you would sell your tech stocks at a loss. This will trigger two things:

  • You can reinvest the proceeds to buy more healthcare stocks.
  • You can use the value of your loss from the tech shares to offset the taxable capital gains from other investments, in this case, healthcare stocks.

The best part? If your losses are larger than the gains, you can use the remaining losses to offset up to $3,000 of your taxable income. 

The Process At a Glance

From the above example, you can say that tax loss harvesting has four main steps:

  • Review your investment portfolio to determine assets that have fallen in value.
  • Rebalance the portfolio by selling losing investments.
  • Use the realized loss to offset capital gains from other investments. Reducing up to $3,000 from the taxable income.
  • Reinvest the money into a similar but not identical asset for future returns. 

Tax loss harvesting is an excellent strategy for high-net-worth individuals and affluent families who wish to ensure long-term after-tax portfolio growth. With minimal tax liability, you keep more of your returns working for you. 

Benefits of Tax Loss Harvesting

The benefits of tax loss harvesting include:

Tax Efficiency 

This is pretty obvious. Tax loss harvesting reduces the amount you would have owed on capital gains and income. 

Reduced Risk

If you have assets you want to sell but are hesitant because of high costs, now is your chance. Tax loss harvesting allows you to do so while lowering your tax bill. 

Turn Volatility Into Opportunity

Tax loss harvesting isn’t a “loophole.” It’s a strategic way to turn market volatility into future returns.

Rules and Limitations You Should Know

Before you rebalance your portfolio, know the rules and limitations of tax loss harvesting. Here are the basics:

Wash Sale Rule

After selling a security at a loss, you can’t buy the same or a substantially identical security within 30 days of the sale. This is known as the wash sale rule. As per the IRS, this rule applies to all accounts under your name. 

Tax Loss Harvesting Deadline

All transactions for harvesting must be executed within the given calendar year. The deadline is usually December 31. 

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