What to Know About Offsetting Capital Gains with Tax-Loss Harvesting

Tax-loss harvesting is a way to cut your tax bill by selling investments at a loss in order to deduct those losses from your taxes. While this doesn't eliminate your losses, it can help you manage your tax liability.

The Details

You may deduct up to $3,000 of capital losses in excess of capital gains for your federal tax return annually. (Your tax or accounting professional can describe how capital losses are treated on your state tax return.) Have remaining capital losses above that amount? They can be carried forward to possibly offset capital gains in following years. 

By taking losses and carrying over the excess losses into the future, you may be able to manage some long-term and short-term capital gains.

Wash-Sale Rule

The "wash-sale" rule means you cannot claim a loss on a security if you buy the same or similar security within 30 days before or after the sale. This IRS rule guards against instances when an investor tries to sell a security to amass a capital loss and then swiftly replace it.

What to Watch For

There may be instances where it doesn't make sense to sell assets in a portfolio for tax-loss harvesting, for example, if it has been created for the long term. Also, note that tax-loss harvesting can only be practiced on taxable accounts; tax-advantaged accounts are considered unsuitable.

Final Thoughts

It might seem like tax-loss harvesting is only something to consider at the end of the year, but it's a practice you can examine all year round.

Remember, the information in this material is not intended as tax or legal advice. It may not be used to avoid any federal tax penalties. Please consult legal or tax professionals for specific information regarding your situation.