Could Tax-Loss Harvesting Save You Money?

If you were hit with a higher-than-desired tax bill due to capital gains taxes, adding tax-loss harvesting to your repertoire of tax saving strategies could help. Here’s what you need to know. 

What Is Tax-Loss Harvesting?

Tax-loss harvesting is a strategy where you sell assets, such as stocks, for a loss to help offset profits you’ve made selling other assets. 

How Tax-Loss Harvesting Works

Capital gains and capital losses aren’t realized until the asset is sold. When an asset, such a stock or exchange-traded fund (ETF), is sold for a profit, the previous owner owes capital gains tax on the profit they made. Tax-loss harvesting can be used to offset those taxes. 

Step 1: Sell underperforming investments

Step 2: Use the loss on the sale to offset the gains made selling other assets

Step 3: Re-invest the money from the sale of underperforming assets into the purchase of other investments that maintain the portfolio’s overall balance

What to Know Before Trying a Tax-Loss Harvesting Strategy

Tax-loss harvesting isn’t a strategy that will benefit everyone. Unless there is a specific reason to sell an asset at a loss, odds are that you’re better off letting your portfolio be and allowing the market to straighten itself out. 

Tax-loss harvesting is most beneficial for investors in higher-income brackets who are dealing with short-term capital gains from sales of stocks, managed funds or ETFs that were held in taxable accounts. 

Only Applies to Taxable Accounts

Because tax-loss harvesting offsets taxable investment gains, only assets held in taxable (non-qualified) accounts can be harvested. Most qualified retirement accounts and education accounts – such as 401(ks), IRAs and 529s – are tax-sheltered, so investors aren’t paying capital gains taxes that would need to be offset. 

Is Most Beneficial in High Tax Brackets

If an investor holds an asset for over a year, the proceeds from the sale of that asset is considered a long-term capital gain as is taxed at 0-20%. If an investor buys and sells the asset within a year, the profit from that sale is subject to short-term capital gains taxes. Short-term capital gains tax rates are the same as income, so for single filers making at least $47,150 in 2024, that would be over 20%. Tax rates on short-term capital gains can go up to 37% for those in the highest tax bracket, which is why offsetting those taxes can be significant. 

Has Limits

Some investment decisions can be carried over the end of the year and to the tax filing deadline, but tax-loss harvesting must be completed before the end of the year. Additionally, there is a tax-loss harvesting limit of $3,000 a year; anything greater than that in a single year must be carried forward. However, because these losses can be carried forward, tax-loss harvesting may be a good strategy for down markets.   

Restricts Asset Purchase

In general, investors want to keep the mix in their portfolio fairly stable. That means that there is at least one reason the asset that was sold was in their portfolio. However, the wash-sale rule states that if an investor sells an asset for tax-loss harvesting, they cannot replace it in their portfolio with the same asset within 30 days (on either side) of the sale.  That means that for the thirty days before the sale and thirty days after the sale, they cannot buy the same asset – or a “substantially similar” one.

Strategies for You

A Farm Bureau Financial Advisor can work with your other professionals – such as your tax advisor – to create a financial plan that works for you.

Neither the Company nor its agents give tax, accounting or legal advice. Consult your professional adviser in these areas.