What Is Tax Loss Harvesting?

As the deadline for April 15th looms closer, investors are looking for ways to lower their tax bill for the 2021 calendar year. One way to do this is through a strategy known as tax loss harvesting. tax loss harvesting is the practice of selling off investments that have decreased in value in order to offset any realized capital gains throughout the year. By offsetting gains, investors can reduce their tax liability and potentially save money.

tax loss harvesting has become increasingly popular as markets have become more volatile in recent years. investors can use the losses they incur in one security to offset the gains they make in another, thus reducing the amount of taxes they have to pay. investors can also use tax loss harvesting to offset gains from other sources, such as capital gains on the sale of a home or business.

The process of tax loss harvesting is relatively simple. investors identify investments that have declined in value and sell them at a loss. The losses are then used to offset the gains made from other investments. This process can be repeated throughout the year, as long as the investor does not buy back the same security within 30 days of selling it.

It is important to note that tax loss harvesting only works for investments held outside of a retirement account. Any losses made on investments held in a retirement account are not eligible for tax loss harvesting. Additionally, investors should be aware that tax loss harvesting does not eliminate taxes altogether. Rather, it lowers the amount of taxes owed by offsetting the gains made from other investments.

While tax loss harvesting can be a useful tool for reducing taxes, it is important to understand the risks associated with the practice. Selling investments at a loss can leave investors with fewer funds to invest and can lower the overall return on their investments. Additionally, investors should be aware that the Internal Revenue Service (IRS) has rules in place to prevent investors from using tax loss harvesting to reduce their tax bill excessively.

When considering tax loss harvesting, it is important to consult with a qualified tax advisor in order to ensure that it is an appropriate strategy for your individual situation. With the right advice, tax loss harvesting can be a powerful tool for reducing taxes and increasing the return on investments.