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Reap the Rewards of Tax Harvesting

Bharo Team

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Feeling nervous about market dips? Don't sweat it! Tax-loss harvesting can turn short-term market woes into long-term tax advantages. This strategy involves selling investments at a loss to offset capital gains and lower your tax bill. Think of it as a financial superpower - making the market work for you, even when it's volatile.

Let's say your investment portfolio has a mix of winning and losing investments. Selling an investment for a profit (capital gain) typically results in taxes owed on those gains, especially if held for less than one year (short-term capital gain). However, investments held for longer than one year may qualify for lower tax rates (long-term capital gain). But what if you could use some of your losing investments to offset those taxes?

That's exactly what tax-loss harvesting allows you to do. Here's the process:

  1. Identify losing investments: Review your portfolio and find investments that have decreased in value compared to what you paid for them (showing a loss).

  2. Sell the losers: Sell those losing investments to lock in the loss.

  3. Reinvest the proceeds: Take the money you received from selling the losers and reinvest it in a similar, but not identical, investment. This is crucial to avoid the wash sale rule, which prevents you from repurchasing the exact same security within 30 days and claiming a loss.

By selling your losers, you generate a capital loss that can be used to offset capital gains from your winning investments. This lowers your overall taxable income and reduces your tax bill. Remember, tax-loss harvesting is a strategy for taxable investment accounts, not retirement accounts like 401(k)s or IRAs, which already offer tax advantages.

Here's why this strategy is so powerful:

  • Reduces your tax burden: By offsetting gains with losses, you pay less in taxes, leaving more money in your pocket to grow your wealth.

  • Boosts long-term returns: The tax savings you reinvest can snowball over time, significantly increasing your overall returns.

It’s beneficial to be on the lookout for opportunities throughout the year. This strategy works best for higher earners who are in higher tax brackets. If you have any more questions or want to delve deeper into the specifics, talking to a financial advisor can be helpful. They can assess your individual situation and advise on the best way to implement tax-loss harvesting in your investment strategy.

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