Tax Income

Understanding Tax-Loss Harvesting

Tax-loss harvesting is a strategy used by investors to improve their tax situation by realizing capital losses. These losses can offset capital gains and potentially reduce ordinary taxable income. While commonly associated with stocks, this strategy can apply to other investments that are subject to capital gains taxes, such as bonds, mutual funds, and real estate investments.

Step	Description
1. Identify Investments with Losses	Review your investment portfolio to identify assets that have declined in value and are now worth less than what you paid for them.
2. Decide Which Losses to Realize	Consider which investments may not recover or do not align with your investment strategy. These are potential candidates for sale.
3. Consider the 'Wash Sale' Rule	Avoid the wash sale rule, which disallows a tax deduction for a security sold at a loss if a substantially identical security is purchased within 30 days before or after the sale.
4. Execute the Sale	Sell the selected investments to realize the capital loss. You must actually sell the asset to claim the loss on your taxes.
5. Offset Gains with Losses	Use the realized losses to offset any capital gains you have incurred during the year. This can reduce your capital gains tax liability.
6. Reduce Ordinary Income	If your capital losses exceed your capital gains, you can use up to $3,000 of the excess loss to reduce your ordinary taxable income each year.
7. Carry Forward Unused Losses	If you have more than $3,000 in excess capital losses, you can carry forward the remaining losses to future tax years indefinitely.
8. Reinvest Carefully	If you plan to reinvest the proceeds from the sale, consider different securities to avoid the wash sale rule, or wait until the 30-day period has passed.
9. Keep Accurate Records	Maintain detailed records of all transactions, including dates, amounts, and security details, to support your tax filings.
10. Consult with a Tax Professional	Before executing a tax-loss harvesting strategy, consult with a tax professional to ensure compliance with tax laws and to optimize the strategy for your specific situation.

It is important to note that tax-loss harvesting is a complex strategy that requires careful consideration of the tax implications and investment goals. Always consult with a qualified tax advisor to ensure that any actions taken align with current tax laws and your overall financial plan.