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Everyone would prefer to have gains in all of their investments, but in years when the stock market (and bonds) have suffered losses nearly across the board, investors can take advantage of a tax benefit commonly referred to as tax-loss harvesting. For individual investors, December 31 is the cutoff to sell your investments that have suffered losses in the current calendar year and use the losses to offset taxes that you owe from capital gains and even from a portion of your income. Tax-loss harvesting is not a strategy for your investments held in retirement accounts, but can be very effective for your investment portfolio. Below we will discuss how to correctly execute tax-loss harvesting, how to rebalance your portfolio to avoid a wash sale, and how to get the biggest benefit — making even more from your investments long term.
Benefits of Tax-Loss Harvesting
Throughout the year a person with a balanced portfolio will accrue capital gains from their investments. This most often comes in the form of dividends or the sale of an asset that had a gain. Your investment portfolio can have a decent amount of capital gains, even if your just invest in index funds.
As an example throughout this article and to keep things simple, let’s say that a couple has an investment portfolio that consists purely of Vanguard Total Stock…
