[00:00] If you ever question whether you should sell a stock for a loss, tax loss harvesting may be the answer you were looking for.
[00:14] After watching this video, you will understand what tax loss harvesting is, the benefits of tax loss harvesting, and the rules you need to keep in mind when performing tax loss harvesting, so you do it properly.
[00:27] But before I go into it, make sure you like this video so others can find it on YouTube and subscribe. So you don't miss our videos that help you reduce your taxable income. Okay, let's jump right into it, answering what is tax loss harvesting.
[00:43] Tax loss harvesting is the practice of selling stocks at a loss and then buying a like kind investment to replace it. Now, you may be scratching your head, wondering why would anybody want to sell a stock at
[00:55] a loss, just to turn around and buy something similar. And the reason is quite simple. Through tax loss harvesting, aka selling at a loss, you can lower a complete offset future capital gains from investments that you
[01:09] sell and make a profit on. Basically, you sell to save on taxes. Now, a couple of questions may come to mind when you hear this, like how much can I save or when does it make sense to sell?
[01:22] Let's answer those questions and more starting with how much you can save. When you sell an investment, you will pay short term or a long term capital gains tax, depending on how long you handle the investment.
[01:35] Let's talk about it. If you hold an investment for a year or less, in sell it, you will pay short term capital gains tax. The short term capital gains tax rate equals your ordinary income tax rate,
[01:47] aka your tax bracket. If you hold an investment for more than a year and sell, you will pay a long term capital gains tax. The long term capital gains tax rate is 0%, 15% or 20%.
[02:00] Depending on your taxable income and your filing status, but a lot lower in most cases, in short term capital gains tax rates. Here's a look at both short term and long term capital gains tax rates,
[02:12] depending on your tax bracket. Yeah, if you're on things, that was a good information. But how much can I save? Good question? Here's your answer. When it comes to capital gains from a sale of an investment,
[02:25] you can offset a hundred percent of the loss towards the gain. Here's an example. Say you sold stock B for 50,000 in gains and sold stock C for 30,000 losses.
[02:38] Your net capital gains would only be $20,000. Sounds good, right? Even better is that even if you don't have any gains, you can use tax loss harvesting to offset your ordinary income.
[02:51] Here's how you can use up to 3,000 losses to offset up to 3,000 ordinary income for the year. This changes to 1,500 if you're married filing separately. If you have more than 3,000 or 1,500 if you're married filing separately
[03:08] and losses, you can carry it over to later years until it's completely used up. Okay, now that we know what tax harvesting is and how much it can help us save on taxes, let's discuss two rules to remember
[03:21] so you perform tax loss harvesting properly. The first rule is the wash, sale, rule. This rule allows your loss if you sell a security and purchase of substantially identical security
[03:35] in 30 days or less. For even more clarity, the IRS literally states the following a wash, sale occurs when you sell or trade a stock or securities at a loss
[03:47] and within 30 days before after the sale, you do the following things. First, buy substantially identical stocks or securities. Second, acquire substantially identical stock
[03:59] or securities in a fully taxable trade. Third, acquire a contract or option to buy substantially identical stocks or securities or for acquire substantially identical stock
[04:12] for your individual retirement agreement, IRA or Roth IRA. And if you got, maybe you can have your spouse by the identical stock security within 30 days and you take the loss, think again.
[04:25] If you sell stock in your spouse or corporation, you control by substantially identical stock, you also have a wash, sale, nice try. If you do perform a wash, sale, you can add the disliked loss
[04:39] to the new cost of the new stock or securities which should be the new cause basis for your new purchase. But hands down the easiest way to avoid a wash, sale is simply to not purchase the security or stock until 31 days
[04:54] after performing tax loss harvesting. Now, the second rule is a simple one. It's that tax loss harvesting only applies to investments held in taxable accounts. 401Ks, 43Bs, IRAs and 529s
[05:10] cannot take advantage of tax loss harvesting because they are generally not taxable. Now, should you go selling and take the losses just to take advantage of tax loss harvesting, the true answer is it depends on your specific circumstance
[05:23] and reason the security is losing value in the first place. In any case, remember that time in the market, typically beats time in the market. So, there you have it, a complete breakdown of tax loss harvesting.
[05:38] If you found any value in this video, go ahead and smash the like button for me. And if you're not already subscribed, go ahead. So you don't miss any video that can help you reduce your tax liability.
[05:51] I'm Karan from Life of County. Until next time.