Counteracting Capital Gains with Tax-Loss Harvesting
Tax-loss harvesting is the practice of selling stocks for less than what you bought for them in order to offset any capital gains you may make.
While this does not eliminate your losses, it can assist you in managing your tax liability.
Remember that this material is for informational reasons only and is not a substitute for real-life guidance, so before adopting any tax strategy that may involve tax-loss harvesting, consult your tax or accounting professionals.
How It Works
In the United States, you can exclude up to $3,000. from your yearly federal tax return if your capital losses exceed your capital profits. (If you have questions about how capital losses are handled on your state tax return, consult with a tax or accounting professional.) Above and above that amount, any further capital losses can be carried forward to possibly offset future capital gains.
You might be able to handle some long-term and short-term capital gains by taking losses and rolling over the excess losses into the future.
The "wash-sale" rule of the Internal Revenue Service is something you need to be aware of. If you buy the same or a "substantially identical" investment within 30 days before or after selling one, you can't claim a loss on the sale. As much as 61 days may pass (in some cases) What this means is that you can't rapidly sell a security and buy another to make up for a fall in value.
If your investment strategy is long-term, you might not want to liquidate assets just to take advantage of tax-loss harvesting. Furthermore, tax-loss harvesting is only allowed in taxable accounts and not tax-favored ones.
You shouldn't wait until the end of the year to consider tax-loss harvesting, even though that's when a lot of investors start to think about it.