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:
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: