Tax Loss Harvesting
To minimize tax liabilities, Tax Loss Harvesting is the practice of selling securities at a loss. Those Capital Losses are used to offset Capital Gains. Calculating Tax Loss Harvests gets a bit tricky and is best explained by the following example. In order for Tax Loss Harvesting to work, one needs to avoid triggering the Wash Sale Rule.
Joe Schmo had the following tax consequences in a calendar year:
A total of $20,000 in long-term gains
A total of $5,000 in long-term losses
A total of $10,000 in short-term gains
A total of $15,000 in short-term losses
Lastly, use the following algorithm, which in plain English means: If Net Long-term Gain/Loss and Net Short-term Gain/Loss are greater than zero, pay the corresponding rates (i.e. $xxx in Long-term gains & $yyy in Short-term gains). Otherwise, net the “Nets” meaning, net the Net Long-term Gain/Loss and Net Short-term Gain/Loss across the bottom row. If the absolute value of the Net Long-term Gail/Loss is greater than or equal to the absolute value of the Net Short-term Gain/Loss, the Net Gain/Loss is considered long-term. Otherwise, the Net Gain/Loss is considered short-term. In this example, the Gain/Loss is a $10,000 capital gain. Clear as mud, right? Thank you, Congress!