You’re ready for any market with tax-loss harvesting | Vanguard (2024)

FAQs

Is tax-loss harvesting really worth it? ›

There are immediate benefits of tax-loss harvesting, such as lowering your tax bill for the year. However, more important are the medium- to long-term payoffs that you can get if you invest the money you freed up in something better. If you do decide to sell, deploy the proceeds thoughtfully.

Many advisors wait until the end of the year to harvest tax losses, but that may not be the best policy. Stock markets frequently go up in the last two months of the year so better harvesting opportunities may be available at other times.

The wash-sale rule is an IRS regulation that prohibits investors from using a capital loss for tax-loss harvesting if the identical security, a “substantially identical” security, or an option on such a security has been purchased within 60 days of the sale that generated the capital loss (30 days before and 30 days ...

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated. The $3,000 loss limit rule can be found in IRC Section 1211(b). For investors with more than $3,000 in capital losses, the remaining amount can't be used toward the current tax year.

Tax-loss harvesting is the timely selling of securities at a loss to offset the amount of capital gains tax owed from selling profitable assets. An individual taxpayer can write off up to $3,000 in net losses annually.

No capital gains? Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).

Sell at year-end and re-buy when January starts

You'll only have until the end of the calendar year to position your portfolio to be in compliance. So you must clear wash sales by Dec. 31 to be able to claim any associated loss on that year's tax return.

After all, even when the market has had a good run, lifting your holdings, you might still have some stocks that are below where you bought them. If you're looking to lock in some of those gains (aka tax-gain harvesting), selling some of your losers can help minimize your capital gains taxes.

Tax-loss harvesting works on taxable investments and doesn't work with tax-deferred retirement accounts such as IRAs and 401(k)s. Long-term capital gains are typically taxed at a lower rate than short-term capital gains, which are usually taxed at the same rate as earned income.

How do I cut my tax bill with tax-loss harvesting? ›

Tax-loss harvesting allows you to sell investments that are down, replace them with reasonably similar investments, and then offset realized investment gains with those losses. The end result is that less of your money goes to taxes and more may stay invested and working for you.

Tax-Loss Harvesting

It is the practice of selling securities at a loss and using those losses to offset taxes from gains from other investments and income. Depending on how much loss is harvested, losses can be carried over to offset gains in future years.

All investing is subject to risk, including the possible loss of the money you invest. Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts.

Many investors undertake tax-loss harvesting at the end of every tax year. The strategy involves selling stocks, mutual funds, exchange-traded funds (ETFs), and other securities carrying a loss to offset realized gains from other investments. It can have a big tax benefit.

If the net amount of all your gains and losses is a loss, you can report the loss on your return. You can report current year net losses up to $3,000 — or $1,500 if married filing separately. Carry over net losses of more than $3,000 to next year's return. You can carry over capital losses indefinitely.

If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040), Capital Gains and Losses.

An investor may also continue to hold if the stock pays a healthy dividend. Generally, though, if the stock breaks a technical marker or the company is not performing well, it is better to sell at a small loss than to let the position tie up your money and potentially fall even further.