Offsetting gains through tax-loss harvesting | Vanguard (2024)

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Offsetting gains through tax-loss harvesting | Vanguard? ›

You can offset all of your capital gains with losses during the same tax year, plus up to $3,000 of ordinary income. If there are remaining losses, you can carry forward those losses indefinitely to offset future gains.

Tax-loss harvesting helps investors reduce taxes by offsetting the amount they have to claim as capital gains or income. Basically, you “harvest” investments to sell at a loss, then use that loss to lower or even eliminate the taxes you have to pay on gains you made during the year.

Offsetting in the Same Year

If you've made both capital gains and capital losses in the same year, you can use the losses to reduce your total taxable capital gains.

What Is a Capital Loss Carryover? Capital loss carryover is the net amount of capital losses eligible to be carried forward into future tax years. Net capital losses (the amount that total capital losses exceed total capital gains) can only be deducted up to a maximum of $3,000 in a tax year.

All investing is subject to risk, including the possible loss of the money you invest. Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts.

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

Tax-loss harvesting is the timely selling of securities at a loss to offset the amount of capital gains tax owed from selling profitable assets. An individual taxpayer can write off up to $3,000 in net losses annually. For more advice on how to maximize your tax breaks, consider consulting a professional tax advisor.

Deduction of Capital Losses

If you have capital losses that exceed capital gains in the current year, you have a net capital loss. You can (but don't have to) carry back the net capital loss to any of the 3 preceding taxation years to be deducted against taxable capital gains in those years.

Utilize tax-loss harvesting

This strategy involves selling underperforming investments and booking a loss. You can use these capital losses to offset taxable investment gains and up to $3,000 each year of ordinary income.

If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.

Can I sell stock at a loss to offset capital gains? ›

But holding on to the investment in hopes of a turnaround could erode your returns further. Taking the loss could allow you to get your portfolio back on track more quickly—and potentially offset capital gains and/or ordinary income.

Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they move out of their PPOR and then rent it out. There are some qualifying conditions for leaving your principal place of residence.

Investors who may want to consider tax-loss harvesting include those who plan to donate their portfolio to charity or bequest it to heirs, as this would not involve realizing capital gains. Investors who plan to liquidate their portfolio eventually would then pay taxes on realized gains.

The three steps in the tax-loss harvesting process are: 1) Sell securities that have lost value; 2) Use the capital loss to offset capital gains on other sales; 3) Replace the exited investments with similar (but not too similar) investments to maintain the desired investment exposure.

Tax-loss harvesting is a good idea when it fits with your overall long-term investment strategy. That is, if you're rebalancing your portfolio in order to bring it back in line with your personal risk/reward profile, you may want to jettison a losing stock.

The taxpayer must first have offset the trading loss against other income of the same tax year. Only if there is insufficient other income to absorb the trading loss can the excess trading loss element be offset against capital gains of the tax year. This excess amount is referred to as the 'relevant amount'.

Utilize tax-loss harvesting

This strategy involves selling underperforming investments and booking a loss. You can use these capital losses to offset taxable investment gains and up to $3,000 each year of ordinary income.

The IRS will let you deduct up to $3,000 of capital losses (or up to $1,500 if you and your spouse are filing separate tax returns). If you have any leftover losses, you can carry the amount forward and claim it on a future tax return.