Last year, I watched my tech stocks tank harder than a lead balloon, and honestly? I was pretty devastated. But then my accountant mentioned something called “tax loss harvesting” during our annual meeting, and suddenly those losses didn’t sting quite as much! Turns out, the IRS actually lets you use investment losses to offset your gains and reduce your tax bill – who knew losing money could actually save you money?

If you’re sitting on some underperforming investments right now, don’t just sulk about it. Let me walk you through how I turned my portfolio lemons into tax-saving lemonade.

What Exactly Is Tax Loss Harvesting Anyway?

Okay, so here’s the deal in plain English. Tax loss harvesting is basically selling investments that have dropped in value to “realize” those losses on paper. Then you can use those losses to offset capital gains from other investments you’ve sold for a profit. It’s completely legal, and the IRS totally allows it.

I remember thinking this sounded too good to be true at first. Like, the government is gonna let me claim my bad investment decisions as a tax break? But yeah, they actually do!

My Personal Tax Loss Harvesting Wake-Up Call

So there I was in December 2023, looking at my brokerage account and feeling like a total dummy. I’d bought shares of a promising biotech company at $45, and they were sitting at $28. Ouch. But instead of just letting them sit there mocking me, I decided to sell them and lock in that $1,700 loss.

Here’s where it gets good though. Earlier that year, I’d sold some Apple shares for a nice $3,000 profit. Normally, I would’ve owed capital gains tax on that whole amount. But by harvesting my biotech loss, I could offset $1,700 of those gains, meaning I only paid tax on $1,300 instead!

The tax savings were real – we’re talking several hundred bucks that stayed in my pocket instead of going to Uncle Sam.

The Wash Sale Rule (Don’t Make My Mistake!)

Alright, confession time. The first time I tried tax loss harvesting, I totally screwed it up because I didn’t know about the wash sale rule. I sold my losing position on a Monday and then – get this – bought it back the following Friday because I still believed in the company long-term.

Turns out, the IRS has a rule that says you can’t claim the loss if you buy the “substantially identical” investment within 30 days before or after the sale. It’s called the wash sale rule, and it exists specifically to prevent people from gaming the system. My accountant was not amused when I told her what I’d done, lemme tell you.

So yeah, you gotta wait at least 31 days before buying back in. Or here’s what I do now – I’ll sell one tech ETF and immediately buy a similar (but not identical) one to stay invested in the sector while still claiming the loss.

When Does Tax Loss Harvesting Make Sense?

Not every situation calls for tax loss harvesting, to be honest. If you’re in a super low tax bracket where you wouldn’t pay capital gains anyway, it might not be worth the hassle. Same goes if you’re investing in retirement accounts like IRAs or 401(k)s – those are already tax-advantaged, so harvesting losses doesn’t help you there.

But if you’re like me, investing in a regular taxable brokerage account with some decent gains? That’s when this strategy really shines. I typically look at my portfolio in November or December each year to see where I can harvest losses before the tax year ends.

My Simple Tax Loss Harvesting Checklist

• Review your taxable investment accounts for unrealized losses
• Calculate whether selling would actually save you money on taxes
• Sell the losing positions before December 31st
• Either wait 31 days to buy back, or invest in a similar alternative
• Keep good records for your tax preparer (trust me on this one)
• Don’t let tax strategy override your investment strategy – selling just to save on taxes when you believe in the long-term potential doesn’t always make sense

The $3,000 Deduction Bonus

Here’s something cool I learned – if your capital losses exceed your capital gains for the year, you can deduct up to $3,000 of that excess loss against your ordinary income. And if you’ve got even more losses than that? You can carry them forward to future years!

One year I had way more losses than gains (not my proudest moment as an investor), but I was able to use that $3,000 deduction against my teaching salary. Then I carried the remaining losses forward and used them the next two years. Silver linings, people.

Your Next Move

Listen, nobody invests planning to lose money. But when it happens – and it will happen to all of us at some point – you might as well make the best of it. Tax loss harvesting won’t make your portfolio losses disappear, but it can soften the blow come tax time.

Just remember to watch out for that wash sale rule, keep your records straight, and maybe chat with a tax professional before making any big moves. Everyone’s situation is different, and what worked for me might not be perfect for you.

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