Personal Finance Essentials
Keeping More of Your Profits via Tax Loss Harvesting
A Sophisticated Investment Strategy That Allows Investors to Turn
Market Downturns Into Potential Tax Advantages
Tax loss harvesting is a sophisticated investment strategy that allows investors to turn market downturns into potential tax advantages. Through this strategy, you sell investments held in taxable accounts that have declined in value and use the money to purchase other, similar investments – preserving your investment strategy. By selling, you can use the losses to offset profits you’ve earned in other investments, potentially reducing your overall tax liability.
For example, if one of your investments has declined in value, you can sell it, realize the loss on paper and use that loss to offset capital gains you’ve earned elsewhere. You then immediately reinvest in a similar but not identical investment, so your portfolio stays on course.
The Wash Sale Rule
There is one critical rule to keep in mind: the Wash Sale Rule. The IRS disallows a loss on investments that you repurchase within 30 days before or after the sale. This means you cannot sell an investment, claim the tax loss and then immediately buy the same investment back. You must either wait 30 days or purchase a different but comparable investment.
Tax loss harvesting requires careful tracking and documentation. You could incur transaction costs, and you need to be aware of tax regulations that limit this strategy. Therefore, you should consult financial and tax advisors before acting.