First, what is this harvesting? – no, you do not need to live in a farm. Tax loss harvesting is selling investment with a loss (take that capital loss) and apply against the capital gain of profitable investments.
Example 1: Sold share of X Inc with a $5k loss (purchased at $7k and sold at $2k) and sold share of Y with a $8k gain (purchased at $12k and sold at $20k). Then, the difference between the gain and the loss is a $3k gain that will be subject to taxation.
Example 2: Sold share of X Inc with a $5k loss (purchased at $7k and sold at $2k) and no other shares sold. Then, if the taxpayer is married filing jointly, there will be a deduction of $3k in the current tax year of the sale, and $2k will be the loss carried forward for future years.
Some of the benefits for this strategy is to reduce the current year taxes, carry forward any unused losses (only up to $3k to be used for MFJ and $1.5k for MFS or Single), and rebalance the portfolio.
Careful with the Wash Sale Rule: To prevent abuse, the IRS prohibits repurchasing the same or a “substantially identical” security within 30 days before or after the sale. Violating this rule disqualifies the loss for tax purposes.
In order to maximize these benefits, you might want to contact a financial advisor and your tax professional if you need further analysis. Feel free to reach out to our team of tax professionals.
