Is tax-loss harvesting worth it? Now more than ever | Vanguard (2024)

FAQs

Is tax-loss harvesting worth it? Now more than ever | Vanguard? ›

Second, because investment losses are necessary for tax-loss

Many advisors wait until the end of the year to harvest tax losses, but that may not be the best policy. Stock markets frequently go up in the last two months of the year so better harvesting opportunities may be available at other times.

“While providing more precision around tax planning can be an effective way to demonstrate your value to clients,” says Geller, tax-loss harvesting may not be right for every investor. “You are effectively just deferring your gain.” Kicking that can down the road can be the best tax solution in some cases.

The bottom line

By strategically harvesting gains in certain tax years, you can potentially reduce your tax liability and keep your portfolio in balance. Be sure to consult your financial advisor and tax professional to implement a strategy that works for your situation.

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

All investing is subject to risk, including the possible loss of the money you invest. Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts.

An investor may also continue to hold if the stock pays a healthy dividend. Generally, though, if the stock breaks a technical marker or the company is not performing well, it is better to sell at a small loss than to let the position tie up your money and potentially fall even further.

Tax-loss harvesting only defers tax payments, it does not cancel them. If an investor has no capital gains to offset in the year the capital loss was “harvested,” the loss can be carried over to offset future gains or future income. There is no expiration date.

The taxes saved today will simply end up being paid in the future because proceeds from sales are reinvested into other assets, which will hopefully be sold at a profit and eventually taxed. Therefore any value add from loss harvesting comes from tax deferral, not permanent tax avoidance.

The remaining capital loss is carried over to future years. You have no choice about how capital losses are used. TurboTax will automatically do the calculations according to the tax law, and there is only one way to do it. There are no options.

Should I sell stocks at a loss for tax purposes? ›

It's generally better to take any capital losses in the year for which you are tax-liable for short-term gains, or in a year in which you have zero capital gains because that results in savings on your total ordinary income tax rate.

You can report current year net losses up to $3,000 — or $1,500 if married filing separately. Carry over net losses of more than $3,000 to next year's return. You can carry over capital losses indefinitely.

Tax Loss Harvesting and IRAs

Instead, taxes are paid once distributions begin. A Roth IRA is in a similar situation and is not eligible for tax loss harvesting. Roth IRA contributions are put in as after-tax funds and gains grow in the account tax-free, so there is no benefit to tax loss harvesting.

Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.

Can I deduct my capital losses? Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains.

Tax-loss harvesting is the timely selling of securities at a loss to offset the amount of capital gains tax owed from selling profitable assets. An individual taxpayer can write off up to $3,000 in net losses annually.

Tax-loss harvesting only defers tax payments, it does not cancel them. If an investor has no capital gains to offset in the year the capital loss was “harvested,” the loss can be carried over to offset future gains or future income. There is no expiration date.

When To Sell And Take A Loss. According to IBD founder William O'Neil's rule in "How to Make Money in Stocks," you should sell a stock when you are down 7% or 8% from your purchase price, no exceptions.