What Is Tax Loss Harvesting?

Tax loss harvesting involves selling investments that have declined in value to “realize” a capital loss. These losses can then be used to offset capital gains from other investments, and in some cases, reduce your taxable income.

Here’s how it works:

• Realize a loss: Sell a security that has declined in value.

• Offset gains: Use that loss to offset any realized capital gains from other investments.

• Carry forward: If your losses exceed gains, you can deduct up to $3,000 ($1,500 if married filing separately) against ordinary income and carry forward any remaining loss to future years.

Why Use Tax Loss Harvesting?

• Reduce capital gains tax: Especially useful in years when you've realized large gains.

• Improve after-tax returns: Freeing up capital while minimizing taxes can enhance long-term returns.

• Rebalance without a tax hit: You can strategically exit positions while mitigating tax impact.

Watch Out for the Wash Sale Rule

One key limitation to be aware of is the Wash Sale Rule. This IRS rule disallows a loss deduction if you purchase the same or a “substantially identical” security within 30 days before or after the sale. To stay compliant, consider replacing the investment with a similar — but not identical — asset for 31 days before reverting back if desired.

Timing Matters

Now is the right time to review your portfolio for harvesting opportunities before year-end. The window closes on December 31st, so starting now gives you flexibility to act strategically, not reactively.

Reach out to your advisor or our office if you have further questions!