In a non-retirement account, tax-loss harvesting is the process of intentionally selling investments that have lost value. There are a variety of reasons it may be a strategy worth considering. For example, it could help you:
- Pay less in taxes by reducing your overall income by up to $3,000 per year
- Offset the taxes owed from selling other investments at a profit
- Reduce your income and/or tax liabilities in future years (losses greater than $3,000 per year carry forward)
- Rebalance your portfolio and/or adjust your asset allocation
By paying less to Uncle Sam today, you can keep more of your hard-earned money working for you in the market rather than putting it toward taxes. And by selling weaker-performing investments, you may be able to improve your portfolio’s overall returns in the long term.
Tax-loss harvesting is a strategy you can use whether the market is up or down. However, it’s especially beneficial following a market correction (a decline of 10% or more from a peak high) or a sharp decline in a particular holding.
What You Need to Know
Your portfolio’s value fluctuates often, both up and down. But those changes aren’t locked in until you sell an asset, or “realize” the difference. Selling an investment at a profit is considered a realized capital gain; selling it for less than the purchase price is considered a realized capital loss.
Each year, the IRS allows you to weigh out capital gains and losses and deduct up to $3,000 in net capital losses to reduce your income or offset realized gains on your tax return. If your losses exceed $3,000, you can carry the additional amount forward indefinitely.