What is Tax-Loss Harvesting and Why Should I Care?
If you're an investor you may have heard of "tax-loss harvesting". For me, this phrase conjures up an image of a farmer digging up old tax returns in a corn field, but I think you're smart enough to know that's probably not what this sort of harvesting entails.
(A family harvesting tomatoes and not capital losses.)
What is tax-loss harvesting?
We don't usually make investments with the hopes that they'll decline in value and we'll lose money, but as we know, it happens. If you have investments that aren't winning for you, you can sell them and the loss will offset the realized gains on your other investments. Your long-term losses are generally deducted from your long-term gains, and your short-term losses are from your short-term gains. Even more than that, any remaining losses can be used to lower your regular taxable income up to $3,000 each year until the losses are exhausted.
Why should I care?
You should care because tax-loss harvesting is a great way to lower your tax burden, and if you have a taxable investment account, you should absolutely give a sh*t about taxes. Taxes lower your returns, and over the long-run, how much you pay in taxes will have a huge impact on the wealth you're able to accrue. Fees and taxes are the monsters eating away at your future. By using strategies such as tax-loss harvesting, you'll preserve more of what you've earned in the market.
(This is the fees and taxes monster I was referring to...V V scary.)
When should I harvest losses?
Most loss harvesting is done at the end of the year when we're preparing for the tax season and rebalancing our portfolios. But technology is awesome and many online platforms and advisor
There's more you should know about tax-loss harvesting (things like the wash-sale rule, transaction costs, and the pros & cons of harvesting losses), so check out this article on Investopedia to learn more!
Disclaimer: This post is purely educational in nature and not intended to be taken as personalized advice. Speak to your financial professional before making any investment decisions!