Here’s Everything You Need To Know About Tax Loss Harvesting
One of the things that angers investors greatly is the tax paid on top of earnings made through their investments. However, there is a strategy that many smart investors use that can essentially minimize taxes on investment earnings by deliberately realizing losses in their portfolio. Let's walk through a detailed example of tax loss harvesting with various steps:
Portfolio Assessment
Review your investment portfolio, including stocks and mutual funds.
Note which investments have increased or decreased in value.
Identify Losses
Find specific investments that are now worth less than their purchase price.
Example: You bought Apple for $10,000, now it’s worth $7,000 — a $3,000 unrealized loss.
Sell Investments at a Loss
Place a sell order to realize the loss.
Example: Sell Apple to lock in the $3,000 loss.
Record Transaction Details
Keep confirmation details from your brokerage (shares sold, sale price, realized loss).
Offset Gains
Match the realized loss with any capital gains.
Example: You sold Walmart for a $5,000 gain earlier — now you can offset $3,000 of that with the Apple loss.
Calculate Tax Impact
Capital losses offset capital gains dollar for dollar.
In this example: $5,000 gain - $3,000 loss = $2,000 taxable capital gain.
Review Net Income Impact
If losses exceed gains, you may apply up to $3,000 of the excess loss to offset ordinary income like wages or interest.
Reinvest Proceeds
Decide how to reinvest the cash from the sale while maintaining your investment strategy.
Be careful of the wash sale rule: avoid buying the same or substantially identical investment within 30 days before or after the sale.
Record Transactions for Tax Reporting
Maintain detailed records of all transactions for year-end tax filing.
Include dates, amounts, sale confirmations, and reinvestment activity.
Disclosure:
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
