Definition
Tax-loss harvesting is a strategy of selling investments at a loss to offset capital gains and reduce tax liability. Realized losses first offset capital gains, then up to $3,000 of ordinary income annually, with excess losses carried forward. To maintain market exposure, investors typically buy a similar (but not substantially identical, to avoid wash-sale rules) investment. This strategy is most beneficial in taxable accounts for high-income investors. Many robo-advisors automate this process.
Formula
Example
You have $10,000 in gains from Stock A. Stock B has a $7,000 loss. Selling Stock B and buying a similar fund creates a $7,000 loss, reducing taxable gains to $3,000 and potentially saving $1,500+ in taxes.
FAQ
What is Tax-Loss Harvesting?
Selling losing investments to offset capital gains taxes.
How do you calculate Tax-Loss Harvesting?
A common formula for Tax-Loss Harvesting is: Tax Savings = Loss Amount × Tax Rate
Why is Tax-Loss Harvesting important?
Tax-Loss Harvesting helps investors evaluate taxes and make more informed decisions.