Counteracting Capital Gains with Tax-Loss Harvesting

Tax-Loss Harvesting Explained Tax-loss harvesting involves selling securities at a loss (i.e., for less than you originally paid) to offset capital gains and reduce your tax liability. While it doesn’t eliminate losses, it can help soften their financial impact by lowering your tax bill.

Keep in mind, this article is for informational purposes only. Always consult with a tax or accounting professional before applying tax-loss harvesting or any other tax strategy to your situation.

How It Works

You can deduct up to $3,000 of capital losses in excess of capital gains on your federal tax return each year. Your tax professional can guide you on how these losses are treated on state tax returns. Any capital losses beyond this limit can be carried forward to future years, allowing you to offset future gains.

This strategy can help manage both short-term and long-term capital gains by spreading out your losses over multiple tax years.

The Wash-Sale Rule

The IRS’s "wash-sale" rule prohibits you from claiming a loss if you repurchase the same or a "substantially identical" security within 30 days before or after the sale. Essentially, you can’t sell a security for a tax benefit and immediately buy it back. (In some cases, the window may be as wide as 61 days.)

Potential Drawbacks

Tax-loss harvesting may not always be suitable, especially if your portfolio is designed for long-term growth. Additionally, this strategy only applies to taxable accounts, not tax-advantaged accounts like IRAs or 401(k)s.

A Year-Round Strategy

While many investors focus on tax-loss harvesting toward the end of the year, it’s something you can consider throughout the year to take advantage of market fluctuations.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest.?FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm.?The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2024 FMG Suite.