Tax loss harvesting is a strategy many investors use to reduce their taxes, but it can be confusing if you’re unfamiliar with it. Whether you’re new to investing or simply looking to understand this strategy better, we’ve got you covered. In this post, we’ll review six significant questions about tax loss harvesting in 2024- 2025 and explain them in simple, easy-to-understand language.
1. What is Tax Loss Harvesting?
Answer:
Tax loss harvesting is when you sell an investment that has lost value to offset any capital gains you’ve made from other investments. The thought is to decrease the assessable pay you report to the IRS, bringing down your general tax bill.
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Explanation & Example:
Imagine you have two investments:
- Stock A, which you bought for $5,000, is presently worth $3,000 (a $2,000 loss).
- Stock B, which you acquired for $2,000, and it’s worth $4,000 (a $2,000 pick-up).
By selling Stock A (the one at a loss), you can use that $2,000 loss to cancel out the $2,000 gain you made on Stock B. Instead of paying taxes on the $2,000 gain, you won’t owe anything because the loss offsets the gain.
In this case, your net taxable gain is $0, which reduces your tax liability for that year.
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2. How Does Tax Loss Harvesting Help Reduce My Taxes?
Answer:
Tax loss harvesting reduces your taxable income by using investment losses to offset any capital gains. It can also help lower your ordinary income tax if your losses exceed your gains.
Explanation & Example:
Let’s say you have $10,000 in capital gains from other investments but $12,000 in losses. Here’s how tax loss harvesting works:
- The $12,000 in losses can offset your $10,000 gains, reducing your taxable capital gains to $0.
- The remaining $2,000 loss can be used to reduce your ordinary income (like wages or salary) to a maximum of $3,000 per year.
So, if your total taxable income is $50,000 and you have $2,000 in leftover losses, your income would drop to $48,000. It reduces the taxable income, saving you money on your tax bill.
3. Can I Use Tax Loss Harvesting for All Types of Investments?
Answer:
You can apply the tax loss harvesting procedure for numerous chargeable investments. You can contribute stocks, bonds, ordinary stocks, and ETFs. Be that as it may, there are a few rules to remember.
Explanation & Example:
Suppose you own a stock (Stock C) in a taxable brokerage account. If the stock has gone down in value, you can sell it at a loss and use that loss to offset gains elsewhere in your portfolio.
However, if you sell the stock and repurchase it within 30 days, the IRS may disallow the loss due to the wash-sale rule. This rule prevents people from selling a security to claim and repurchase a tax loss.
For example:
- You sell Stock C at a loss for $1,000.
- Then, you repurchase Stock C within 30 days.
- Because of the wash-sale rule, you cannot claim the $1,000 loss on your taxes.
To avoid this, you could wait 31 days to repurchase the same stock or buy a similar but not identical security instead.
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4. When is the Best Time to Harvest Losses?
Answer:
The best time to harvest losses is ordinarily towards the end of the year, regularly in October through December. This permits you to capture any misfortunes from that year to counterbalance gains, diminishing your tax charge for the current year.
Explanation & Example:
Let’s assume it’s December, and you’ve realized a $5,000 gain from selling some of your stock earlier in the year. However, you also have $3,000 in losses from another stock. By selling that stock at a loss before the end of the year, you can offset some of those gains, reducing your taxable income for the year.
Here’s how it works:
- You made $5,000 in gains from Stock X.
- You sold Stock Y at a $3,000 loss.
- After harvesting the loss, your taxable gains are reduced to $2,000.
In this case, you’ve saved taxes by lowering the taxable gains from $5,000 to $2,000.
5. How Much Can I Offset With Tax Loss Harvesting?
Answer:
You can use your investment losses to offset capital gains in a year. If your losses exceed your gains, you can use up to $3,000 of the remaining losses to offset other types of income, like wages.
Explanation & Example:
Let’s say you have $10,000 in capital gains from the sale of a stock and $15,000 in losses from other investments. Here’s how the offset works:
- First, you apply your $10,000 in losses to your $10,000 in gains, which brings your capital gains tax bill down to $0.
- You still have $5,000 in unused losses. You can use up to $3,000 to reduce your taxable income, like your salary.
- The remaining $2,000 in losses can be carried forward to the following year.
If your taxable income were $60,000 before harvesting, it would drop to $57,000 after the $3,000 loss deduction.
6. Are There Any Risks to Tax Loss Harvesting?
Answer:
Yes, there are some risks to tax loss harvesting. The main risk is that you may temporarily sell down investments that could recover and lose out on future gains by selling them to harvest losses.
Explanation & Example:
Tax loss harvesting is a better strategy to help you minimize your tax in 2024 – 2025. But it requires careful planning and thought.
By understanding how it works, knowing when and how to apply it, and being careful of the perils, you can make more clever choices to take advantage of your accounts.
Always consult a money-related advisor or professional to ensure that debt collection fits your overall strategy. It’s a great way to oversee your assessed liabilities while remaining on track with your speculation.
While tax loss harvesting can help you lower taxes, ensure you’re not selling investments you believe in just for the tax benefits.
Read the Full Topic about Capital gains and losses and Tax Loss harvesting from the Internal Revenue Service.
Final Thoughts About Tax Loss Harvesting
Tax loss harvesting is an effective strategy for decreasing your tax bill in 2024 – 2025, but it requires careful planning and thought.
By understanding how it works, knowing when and how to apply it, and being careful of the perils, you can make more brilliant choices to take advantage of your funds.
Always consult a budgetary advisor or someone proficient in ensuring that charge misfortune collecting fits yours with a comprehensive approach. It’s a great way to oversee your charge liabilities while remaining on track with your Goals.
