Investing in the market is a rollercoaster. Sometimes you’re up, and sometimes you’re down. While no one likes to see their account balance drop, there is a silver lining that savvy investors use to their advantage: Tax-Loss Harvesting.

This strategy allows you to turn your investment "lemons" into tax-saving "lemonade." But how exactly does it work, and is it right for you?

What Is Tax-Loss Harvesting?

Tax-loss harvesting is the practice of selling an investment that has lost value to offset the taxes you owe on gains from other investments.

When you sell an asset for a profit, you owe capital gains tax. However, the IRS allows you to use your losses to lower that tax bill. By "harvesting" a loss (selling the loser), you can neutralize the gains from your winners.

How It Works: A Real-World Example

Imagine your portfolio had a busy year:

• Winner: You bought Tech Stock A for $10,000 and sold it for $15,000. You have a $5,000 capital gain.
• Loser: You bought Energy Stock B for $8,000, but it’s now worth only $5,000. You have an unrealized $3,000 loss.

If you do nothing, you owe taxes on the full $5,000 gain.

However, if you harvest the loss: You sell Stock B and lock in that $3,000 loss. You can now subtract that loss from your gain ($5,000 - $3,000). Now, you only owe taxes on $2,000 instead of $5,000.

The Bonus Benefit: Offsetting Ordinary Income

What if you had a really bad year and your losses are bigger than your gains? The IRS offers a consolation prize.

If your losses exceed your gains, you can use the remaining loss to offset up to $3,000 of your ordinary income (like your salary or wages) per year. If you still have losses left over after that, you can carry them forward to future tax years indefinitely.

When Should You Harvest Losses?

While many investors scramble to do this in December before the tax year ends, tax-loss harvesting can be done year-round. It is often most effective when:

• You are rebalancing your portfolio.
• You have realized significant short-term capital gains (which are taxed at a higher rate).
• The market is experiencing a downturn.

The Bottom Line

Tax-loss harvesting is a powerful tool to improve your after-tax returns, but it requires careful execution to avoid IRS penalties. At Champs Insurance, we believe in looking at your whole financial picture.

Do you have questions about how your investments impact your financial security?

Contact Champs Insurance Today