Investment Losses? Harvest them for a Tax Deduction

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No one likes to lose money on their investments.

However, in some cases, it is unavoidable.  If you are looking at some investment losers, though, you might consider how you can use them to your advantage.

Tax harvesting your losses allows you to get a deduction when you sell for less than you bought for.  As you get close to the end of the year, and you begin planning to maximize your tax deductions, consider how your investments losses can reduce your tax liability:

Offset Capital Gains


The first thing you can do is use your capital losses to offset your capital gains.

You can offset any capital gains you received, dollar for dollar, with your losses.  However, you need to be aware that, in order to offset, your investments need to be sold, and cleared, by the end of the year.

Consider selling some losing stocks if you sold some investments for gains earlier in the year.

Reduce Your Taxable Income

If you don’t have any capital gains to offset, or if your capital losses exceed your capital gains, you can use your losses to offset some of your income.

You can reduce your taxable income by up to $3,000 when you have losses.  If you have $8,000 in capital gains, and $10,000 in capital losses, you will first offset your gains, leaving $2,000 “left over.”  That money should be listed on Schedule D, and it will serve as a tax deduction.

Carry Excess Capital Losses Forward

tax harvesting investment losses

Use your investment losses to lower your taxable income.

One of the great things about the ability to deduct your capital losses is that you can carry forward the left overs to another year.

If you had $8,000 in gains, and $12,000 in losses, you would first offset your gains, and have $4,000 remaining.  Then, you can reduce your income by $3,000.  Next, you can “save” that $1,000 and carry it forward to another year.

You can carry forward losses indefinitely.  That means that if you take a big loss one year, and few losses going forward, you can continue to use your current losses to your advantage.

Watch Out for the Wash Sale Rule

If you decide to harvest your investment losses for a tax advantage, you need to watch out for the wash sale rule.

The IRS is well aware that you could can sell an investment at a loss, and then turn around and buy the same investment for cheap.  That would allow you to take advantage of the tax break, and repurchase at a low rate to boost your profits down the road.

While it’s a nice thought, the IRS doesn’t allow it.

Such an attempt is known as a “wash sale.”  While it’s not illegal to sell an investment, and the buy the same thing at a lower price within 30 days, the IRS won’t let you do this for the sake of taking a tax deduction.  If you buy something “substantially identical” within 30 days of selling an investment, you won’t be able to claim the loss on your taxes.

So it is a good idea to carefully consider your investing strategy before you sell a loser.

Your investment losses can help you reduce your taxable income.  It’s not as good as a dollar for dollar reduction in your tax liability, but it can reduce how much you owe over all.

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Published or updated April 16, 2013.

Comments

  1. Investir na bolsa says:

    Here in Brazil, we pay our incomes over stock market profits monthly.

    But here we cannot use this to a tax reduce in overall incomes just for stock makert profits

  2. I would suggest to people to try and keep their loss sales as close as possible to the $3,000 income reduction limit. It would make sense to sell just enough losers as you would need to maximize the tax benefits without dumping the shares then having a run-up in price the next year and losing out on any possible gains.

    Sometimes, people get too caught up in the short-term objective of minimizing tax liability and lose sight of the original reason they are holding the investment in the first place. The short-term tax break may be minimal compared to long-term dividend pay-outs or gains in the long-term.

  3. Winn @ Stock Income Method says:

    I totally agree with Eric because the main reason we invest is to build a good portfolio so we can improve our financial situation. However selling your lose investment as a way to offset tax is only a good idea if you are want to sell that position anyway. Most of the time if you are investing for value, your losing position maybe a good time to buy more share because as your stock going lower you can buy more value. However it is only a good idea to buy more share if that stock is high quality. In my opinion never ever sell a stock because of tax reasons. The money you save is very low in most case.

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