Losing money is never someone’s idea of a long-term investment plan, but a well-diversified portfolio will usually contain some investments that have indeed lost value, at least over the short term. But sometimes an investment that has lost value can still do some good.
Given the recent ups and downs in the market, now could be a great time to do some tax loss harvesting in your taxable portfolios. If you have an investment that has lost money, then you can sell it and realize that loss. By selling your losers, you can reduce your tax bill either directly or by offsetting gains.
Here are a few key takeaways to keep in mind as you see how tax-loss harvesting might help you lower your tax bill:
- Applies only to taxable accounts (think brokerage accounts, individual accounts, joint accounts, etc.; NOT 401ks, IRAs, Roth IRAs, etc. because these are qualified accounts)
- Even if you don’t currently have any gains, there are benefits to harvesting losses now, since they can be used to offset income or future gains
- If you have more capital losses than gains, you can use up to $3,000 a year to offset ordinary income, and carry over the rest to future years
- When looking for tax-loss selling candidates, consider investments that no longer fit your strategy, have poor growth prospects, or can be easily replaced by other similar investments
- Stay diversified, but beware of wash sales (read more about wash sales)
- To enhance your potential tax savings, you should apply as much of your capital loss as possible to short-term gains, because they are usually taxed at a higher marginal rate.
- Make tax-loss harvesting part of your year-round tax strategy