Can Tax Loss Harvesting Help Offset Gains?

Tax season is coming up faster than you think, and changes you make to your portfolio now can have a noticeable effect on how much you pay.

One strategy that many investors use to limit their tax exposure is tax loss harvesting. Tax loss harvesting is selling securities at a loss to offset a capital gains tax liability. This strategy can be most advantageous in limiting taxes paid on short-term capital gains. You should consult with a tax professional to determine whether tax loss harvesting or any other tax strategy is right for you.

Note the difference between short-term and long-term gains:

Short-term gains — Typically, investments held for 1 year or less are taxed at your ordinary income tax rate.

Long-term gains—Investments held for more than 1 year can be taxed at a preferential rate. Depending on your income, this tax rate falls anywhere from 0-20%.

Of course, tax loss harvesting isn’t as easy as it seems – there are a few things you should keep an eye on.

Beware of wash sales

The Internal Revenue Service considers double transactions on “substantially similar” securities inside a certain time period to be a wash sale. These types of transactions can limit your ability to take a loss in the current tax year and can result in an adjustment to the cost basis of your new position.

This rule can apply even if you have multiple taxable accounts. For more information, you can review wash sale rules on IRS.gov.

Limits toward ordinary income

An unlimited amount of capital losses can be applied against capital gains, but there is a limit on capital losses that can be applied to offset ordinary income for the year. You might be able to use remaining amounts in subsequent years. For more information, you can review limits on IRS.gov.

Consider transaction costs

It is important to weigh the benefits of tax harvesting in conjunction with the transactional costs of buying and selling securities. Low-cost trading options can make tax loss harvesting a more beneficial tactic for investors.

Question: What portfolio strategies have you used to cut your tax bill?

Next Step: Our Gain/Loss & Tax Center provides you with the latest in cost basis calculation and tax strategy.

Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.

The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

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