Tax-loss harvesting

What is tax-loss harvesting?

Tax-loss harvesting is the process of selling investments at a loss in order to offset capital gains. This can be an effective way to reduce your tax bill, but it's important to understand the rules and limitations before you get started. Here's what you need to know about tax-loss harvesting.

How can tax-loss harvesting help you save on taxes?

If you have investments that have gone up in value, you may be liable for capital gains taxes when you sell them. However, if you also have investments that have lost value, you can use those losses to offset your gains. This is known as tax-loss harvesting, and it can be a valuable tool for reducing your tax bill.

Here's an example: let's say you have a stock that you bought for $10,000 that is now worth $20,000. You also have a stock that you bought for $5,000 that is now worth $4,000. If you sell the first stock, you'll have a $10,000 capital gain that will be subject to taxes. However, if you sell the second stock, you'll have a $1,000 capital loss. You can use that loss to offset your gain, and as a result, you'll only be taxed on $9,000 of your gain.

What are the benefits of tax-loss harvesting?

Tax-loss harvesting can be a valuable way to reduce your tax bill. In addition, it can also help you rebalance your portfolio. If you have a stock that has lost value, selling it and using the loss to offset gains can help you bring your portfolio back into balance.

What are the drawbacks of tax-loss harvesting?

There are a few potential drawbacks to tax-loss harvesting. First, it can be time-consuming to keep track of your gains and losses. Second, if you're not careful, you could end up triggering a capital gains tax if you sell an investment for a loss and then buy it back within 30 days. Finally, tax-loss harvesting only works if you have taxable gains to offset. If you don't have any gains, you won't be able to use losses to reduce your tax bill.

How can you maximize the benefits of tax-loss harvesting?

There are a few things you can do to maximize the benefits of tax-loss harvesting. First, make sure you keep good records of your gains and losses. This will help you keep track of your tax liability and make sure you don't inadvertently trigger a capital gains tax. Second, consider using a tool like TurboTax's Capital Gains Estimator to help you estimate your gains and losses. This can help you make sure you're taking advantage of all the opportunities for tax-loss harvesting. Finally, remember that tax-loss harvesting only works if you have taxable gains to offset. If you don't have any gains, you won't be able to use losses to reduce your tax bill.

Is tax-loss harvesting right for you?

Tax-loss harvesting can be a valuable way to reduce your tax bill. However, it's important to understand the rules and limitations before you get started. If you're not careful, you could end up inadvertently triggering a capital gains tax. Additionally, tax-loss harvesting only works if you have taxable gains to offset. If you don't have any gains, you won't be able to use losses to reduce your tax bill. With that said, if you're comfortable with the risks and you have gains to offset, tax-loss harvesting can be a great way to save on taxes.

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