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Counteracting Capital Gains with Tax-Loss Harvesting

Tax-loss harvesting means taking capital losses (selling securities for less than what you initially paid for them) to offset any capital gains you may have.

While this doesn’t get rid of your losses, it can help you manage your tax liability.

Keep in mind that this article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax or accounting professionals before implementing any tax strategy that may involve tax-loss harvesting.

HOW IT WORKS

You may deduct up to $3,000 of capital losses in excess of capital gains for your federal tax return each year. (Your tax or accounting professional can speak to how capital losses are treated on your state tax return.) Any remaining capital losses above that can be carried forward to potentially 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

You must watch out for the Internal Revenue Service’s “wash-sale” rule. You can’t claim a loss on a security if you buy the same or a “substantially identical” security within 30 days before or after the sale. (The window is even 61 days wide in some instances.) In other words, you can’t just sell a security to rack up a capital loss and then quickly replace it.

POTENTIAL DRAWBACKS

You may not wish to sell assets in a portfolio for tax-loss harvesting, especially if it has been built for the long term. Also, you can only practice tax-loss harvesting in taxable accounts; tax-advantaged accounts are ineligible for this strategy.

YEAR-ROUND STRATEGY

While some investors get to thinking about tax-loss harvesting as the year comes to a close, it’s a practice that you can consider all year round.

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