Tax Harvesting

Tax loss harvesting is a strategy used by investors to minimize capital gains taxes on their investments. It involves selling investments that have experienced a loss in value to offset or “harvest” those losses against capital gains from other investments. By doing this, investors can reduce their overall taxable income and, consequently, lower their tax liability.

Here’s how tax loss harvesting works:

1. Identify Investments with Losses: Investors review their portfolio to identify investments that have declined in value since their purchase.

2. Sell the Underperforming Investments: They sell these underperforming investments to realize the capital losses.

3. Offset Gains: The capital losses are then used to offset capital gains generated from profitable investments. This can reduce the overall taxable income from investments.

4. Deduct Remaining Losses: If the capital losses exceed the capital gains, investors can use the remaining losses to offset up to a certain amount of ordinary income, typically up to $3,000 per year for individual taxpayers (the exact amount may vary by tax laws).

It’s important to note that tax loss harvesting has rules and limitations, and it must be done in accordance with tax regulations and guidelines. Additionally, there are specific holding period requirements and restrictions on “wash sales,” where an investor buys back a substantially identical security within a short time frame, which can negate the tax benefits of the strategy.

Investors often engage in tax loss harvesting near the end of the tax year to optimize their tax situation, but it’s essential to consult with a tax advisor or financial professional to ensure compliance with tax laws and to make informed decisions based on individual circumstances.