## May 27 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.

### EXAMPLE

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

Create a table that looks like this, and net the results of the Long-term and Short-term columns:

Long-TermShort-Term
Gains20,00010,000
Losses-5,000-15,000
Net Gain/Loss15,000-5,000

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!

If Net LT GL & Net ST GL > 0
Pay corresponding rates
Else
Net GL = Net LT GL + Net ST GL
If abs(Net LT GL) >= abs(Net ST GL); Net GL is LT
Else; Net GL is ST