Tax-loss harvesting

Tax-loss harvesting is a technique for "generating" capital losses. It occurs when an investor sells a security that has depreciated in value. CBS News describes tax loss harvesting specifically as "selling an investment at a loss with the intention of ultimately repurchasing the same investment after the IRS]'s 30 day window on Wash sales has expired." This allows investors to lower their tax amount with the use of investment losses. Tax loss harvesting can be done throughout the fiscal year, allowing investors to "offset capital gains with capital losses." If an investor has more capital losses than gains in a year, that year they can use up to $3,000 as a deduction to "offset ordinary income", with the remainder carrying over into future years if unused. Loss harvesting defers taxes, but doesn't eliminate them, and is essentially receiving a loan without interest from the federal government, assuming marginal tax rates are the same. If marginal rates are different, then there can be additional tax savings (e.g., deducting excess losses against a higher ordinary income rate in one year in exchange for additional long term capital gains tax at a lower rate in a later year) or even a tax penalty (e.g., deducting at a lower capital gains tax rate in several years in exchange for a much larger gain in one later year that puts one in a higher capital gains tax and Medicare investment income tax bracket.)

Quotes

• Another factor to consider is your overall investment strategy. Tax-loss harvesting can be beneficial in the short term, but it should not be the driving factor behind your investment decisions. It’s important to make sure that you are making decisions based on your long-term goals and investment horizon.

• ChatGPT ChatGPT wrote part of this article—it didn’t go great (Published Thu, Jan 26 20239:00 AM EST)