When the stock market dips, most investors panic. But the smartest ones see an opportunity to make future gains, legally and strategically using tax-loss harvesting.
This clever strategy allows investors to turn their losses into tax savings, helping them keep more money in their pockets. Here’s how it works and why more people are using it to reduce taxes and grow their wealth.
What Is Tax-Loss Harvesting?
Tax-loss harvesting is when investors sell stocks or assets that have lost value to offset taxable gains elsewhere in their portfolio. By doing this, they can lower their overall tax bill while still keeping a strong investment position.
It’s important to note that this strategy applies only to taxable brokerage accounts, not retirement accounts like 401(k)s or IRAs.
Why This Strategy Works All Year Long
Most people think tax-loss harvesting is something to do at the end of the year, but experts say you should take advantage of it year-round. Markets fluctuate constantly, and waiting until December could mean missing out on valuable tax-saving opportunities.
By reviewing your portfolio regularly, you can capture losses when they happen and reinvest strategically.
How to Use Tax-Loss Harvesting to Your Advantage
If you want to lower your tax bill and keep your investments strong, follow these simple steps:
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Identify Your Losing Investments – Check your portfolio for stocks, ETFs, or mutual funds that are worth less than what you paid for them.
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Sell at a Loss – Selling these assets locks in a capital loss, which can be used to offset gains on other investments.
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Reinvest Smartly – To stay in the market, reinvest in similar but not identical assets. This avoids the IRS wash-sale rule, which prevents investors from repurchasing the same stock within 30 days.
Tech Makes It Easier Than Ever
Until recently, tax-loss harvesting was something only the rich and their financial advisors took advantage of. But thanks to automated investment tools from companies like Vanguard and Schwab, everyday investors can now benefit from this strategy with little effort.
Many robo-advisors automatically scan portfolios for tax-saving opportunities, making it easier than ever to take advantage of market downturns.
What You Should Know Before Trying It
While tax-loss harvesting can save you money, there are a few things to keep in mind:
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Trading Fees: If your brokerage charges fees, frequent trading could eat into your savings.
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Tax Complexity: The strategy requires keeping track of losses and gains, which can get tricky over time.
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Future Taxes: Selling at a loss lowers the cost basis of your investments, which could lead to higher taxes when you sell in the future.
The Bottom Line
Tax-loss harvesting is one of the smartest ways to turn market downturns into long-term financial gains. By carefully selling losing investments and reinvesting wisely, investors can reduce taxes and position themselves for future growth.
If you’re unsure about how to get started, a financial advisor or an automated tax tool can help you take full advantage of this money-saving strategy.
