Tax-Loss Harvesting: How to Turn Investment Losses Into Tax Savings

Losing money on an investment is never ideal, but it may offer an opportunity to reduce your tax bill. Through a strategy called tax-loss harvesting, individual taxpayers can use certain investment losses to offset capital gains and potentially lower their taxable income.

As the year comes to a close, take a closer look at your investment portfolio. Selling certain underperforming investments may help strengthen your overall financial and tax strategy.

How Does Tax-Loss Harvesting Work?

Tax-loss harvesting is a strategy that involves selling an investment for less than you paid for it and using the resulting loss to offset gains from other investments.

For example, if you realize a $5,000 gain on one investment and a $3,000 loss on another, the loss can offset part of the gain, leaving you with $2,000 in net capital gains.

If your losses exceed your gains, you may also be able to use a portion of the remaining losses to reduce your taxable income, while carrying any unused losses forward to future tax years.

Understand the Wash-Sale Rule

Before selling an investment at a loss, be aware of the IRS wash-sale rule. This rule generally prevents you from immediately claiming the loss if you purchase the same or a substantially identical investment within 30 days before or after the sale.

For example, if you sell shares of a stock at a loss and repurchase the same or a substantially identical investment within this 61-day window, the loss may be disallowed for current tax purposes. The wash-sale rule can also apply to purchases made in other investment accounts, making it important to review your transactions carefully.

Consider Short-Term and Long-Term Gains

How long you have owned an investment can affect how its gain or loss is treated for tax purposes.

• Short-term investments: Assets held for one year or less. Gains are generally taxed at ordinary income tax rates.

• Long-term investments: Assets held for more than one year. Gains generally qualify for lower long-term capital gains tax rates.

Capital losses can be classified as short-term or long-term, which affects how they offset gains when calculating your overall tax liability. 

Make Tax-Loss Harvesting Part of Your Year-End Planning

Tax-loss harvesting can be a useful strategy, but selling investments solely for a tax deduction may not support your long-term financial goals. Consider your overall portfolio, investment timeline, and potential tax savings before making changes.

As the year comes to a close, take time to review your investment activity, including any gains or losses you have realized. A tax professional can help you understand how these transactions may affect your tax return, identify potential tax-saving opportunities, and ensure they are reported correctly.

Plan Ahead for Potential Tax Savings

Investment losses do not always have to be a setback. With thoughtful planning, losses may help offset capital gains, reduce your overall tax liability, and provide potential tax benefits in future years. Reviewing your portfolio before December 31 gives you time to evaluate your options and make informed decisions before the tax year closes.

Have questions about how your investments may affect your taxes? Connect with a VAAS Tax Professional to review your situation and explore tax-planning opportunities before the close of the year.