Tax Loss Harvesting

As per the tax-loss harvesting meaning, it implies the process of selling the securities at some loss for offsetting the Tax Liability for Capital gains. The given strategy has been typically employed for limiting the revealing of Capital Gains on a short-term.

Short-term or temporary capital gains are usually taxed at a higher value of federal income tax rate in comparison to capital gains that are long-term. However, the given method might also be responsible for offsetting capital gains on the long-term Basis.

Getting an Understanding of Tax-Loss Harvesting

The process of tax-loss harvesting also goes by the name as ‘tax-loss selling.’ Typically, the given strategy gets implemented towards the calendar year’s end. However, it might occur at any given period of the entire taxation year.

With the process of tax-loss harvesting, the investment that might have undergone unrealized loss gets sold off. This allows the credit against any type of Realized Gains occurring in the Portfolio. The asset that gets sold then experiences replacement with some similar asset for maintaining the Asset Allocation of the portfolio along with return levels and expected risks.

For most of the investors out there, the process of tax-loss harvesting serves to be the most important tool when it comes to reducing the overall Taxes. While tax-loss harvesting is not known to restore the investor to the previous position, it can still help in lessening the overall loss’s severity. For instance, the loss in Security A’s value could be sold out for offsetting the increase in Security B’s prices. Therefore, this would eventually help in eliminating the tax liability of the capital gains with respect to security B.

Working of Tax-loss Harvesting

Most of the investors prefer making use of this strategy at the financial year’s end when they are required to file the respective returns. However, now it is possible to use the same across the entire year in some planned manner for keeping the respective capital gains at a comparatively lower level.

The process of tax-loss harvesting is known to commence with the sale of some Equity Fund or stocks that might be experiencing some constant decline in the overall prices. You might feel that the security might have lost its majority value as well as opportunities of some rebound. Once you have realized the loss, you can Offset the same against capital gains that the respective portfolio would be earning in the given period.

The amount that gets realized from the sale of the respective equity fund or stock that is resulting into a loss should be utilized for buying the lucrative equity fund or stocks. This type of replacement is required for maintaining the overall genuine asset allocation of the entire portfolio. Moreover, it also helps in keeping the risk-return profile of the portfolio intact.