What is tax-loss harvesting, and how does it work on Vested?

What is tax-loss harvesting, and how does it work on Vested?

Tax-loss harvesting is a strategy used to reduce taxable capital gains of your portfolio: You deliberately sell assets that have incurred losses to offset current or future capital gains.

Example: Let's say the long-term capital gains are taxed at 12.5%, and short-term capital gains are taxed at the investor's marginal rate, for example, 25%.


Below are the investor's portfolio gains and losses and trading activity for the year:

Portfolio:

Stock A: $25,000 unrealized gain, held for 450 days

Stock B: $13,000 unrealized loss, held for 835 days

Stock C: $10,000 unrealized loss, held for 125 days


Trading Activity:

Stock E: Sold, realized a gain of $20,000. It was held for 880 days

Stock F: Sold, realized a gain of $15,000. It was held for 350 days


The tax owed from these sales is:

  1. Tax without harvesting = ($20,000 x 12.5%) + ($15,000 x 25%) = $2,500 + $3,750 = $6,250

If the investor harvested losses by selling stocks B and C, the sales would help to offset the gains, and the tax owed would be:

  1. Tax with harvesting = (($20,000 - $13,000) x 12.5%) + (($15,000 - $10,000) x 25%) = $875 + $1,250 = $2,125