What is Tax Loss Harvesting?

When markets are volatile, one silver lining for investors is a strategy called tax loss harvesting. It allows you to turn investment losses into potential tax savings by strategically selling underperforming assets to offset capital gains.

How Tax Loss Harvesting Works

If you sell an investment at a loss, you can use that loss to offset capital gains from other investments you’ve sold at a profit. And if your losses exceed your gains, you can even deduct up to $3,000 against ordinary income, and carry over the rest to future tax years.

Here’s a simplified example:

• You sell Stock A at a $5,000 gain.
• You sell Stock B at a $5,000 loss.
• Your gain is completely offset, and you pay no capital gains tax.

The Wash Sale Rule

A key caveat: you can’t immediately repurchase the same or a “substantially identical” security within 30 days before or after the sale, or the IRS will disallow the loss. But there are smart ways to maintain your market exposure, such as buying a similar fund or ETF during that time.

When to Consider Tax Loss Harvesting

This strategy is especially useful in years with significant market declines or if you’re actively rebalancing your portfolio. It’s also worth exploring toward the end of the calendar year, as part of year-end tax planning.

Why It Matters

Tax loss harvesting isn’t just about reducing your tax bill this year. It’s about creating long-term tax efficiency in your portfolio. It’s a proactive way to turn a negative into a positive.

Want help turning volatility into opportunity? At Sandbox Financial Partners, we can help you integrate tax-smart strategies like tax loss harvesting into your overall plan. Reach out to our team today (contact us).