We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is Tax Loss Harvesting?

Malcolm Tatum
By
Updated: May 17, 2024
Views: 7,005
Share

Tax loss harvesting is a financial strategy designed to offset taxes that would apply to capital gains earned during the tax period. The strategy usually focuses on gains created by short-term investments, since many countries tax capital gains on these types of investments at a slightly higher rate than gains earned by long-term investments. While tax loss harvesting is a workable and legal strategy in many nations, there are usually some limitations on how the harvesting approach can be utilized.

In order to create the tax loss, it is necessary to sell a short-term security at a loss, effectively creating a capital loss on that investment. The capital losses that are experienced by the sale help to offset the capital gains earned on a different short-term investment. This tax loss harvesting strategy will only work if the capital gains and the capital losses take place within the same taxation period.

While the tax loss harvest does help to minimize taxes, the process does also reduce the amount of overall gains for the period. As one way to minimize the loss, many investors will choose to purchase stock that is connected with a company still within the same general category, but not like the stock that was sold. For example, if the stock sold was connected with a long distance service provider, the investor may choose to replace the stock by purchasing shares in a conference call bureau. Both companies are considered part of the telecommunications industry but are not similar in their nature and function.

In the event that the investor wants to repurchase shares of the stock that was sold in order to create the tax loss harvesting, it is important to observe applicable laws that govern this action. Often, there is a waiting period before the repurchase can take place and not impact the tax loss harvesting process. In just about every situation, it is necessary to wait at least a full calendar month before initiating the repurchase.

Investors should keep in mind that many countries do not impose limits on the amount of capital losses that may be claimed against capital gains earned in the tax period. However, there are usually some limits on how much of the loss incurred as part of the tax loss harvesting can be applied to ordinary income. The death of a spouse during the tax period may also impact how the loss created with the harvesting strategy can be applied to the gains earned during the period. In order to understand exactly how tax loss harvesting can function within a given country, it is important to become familiar with all regulations that affect trading activity within that country.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wisegeek.net/what-is-tax-loss-harvesting.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.