Tax-loss harvesting is a year-end tax management strategy for investors. The practice involves selling losing investments, booking the losses, and purchasing replacement securities. Investors achieve a desirable portfolio mix and capture capital losses to reduce current or future taxes. Here’s a basic overview of how tax-loss harvesting works:
- Identify Losses: Investors identify positions that have declined in value since the purchase date.
- Sell Losing Investments: Investors sell the underperforming investments to book the losses.
- Offset Gains: The resulting capital losses are then used to offset capital gains from other investments in the current tax year. If losses exceed these gains, investors can offset up to $3,000 of other income. Any remaining losses can be carried forward to future years.
- Maintain Portfolio Exposure: Investors may replace the losing investments with similar, but not identical, investments to maintain the desired portfolio allocation. This step is crucial to avoid violating the IRS’s “wash-sale” rule.
Tax rules are complex. Investors individuals should always consult a tax professional or financial advisor before proceeding.
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