Tax-Loss Harvesting: A Savvy Strategy to Lower Your Tax Bill
Tax-loss harvesting is one of the most valuable yet underutilized tax strategies for high-income investors. Unlike complex tax loopholes, this straightforward approach can create meaningful tax savings while keeping your investment strategy intact.
What Is Tax-Loss Harvesting?
Tax-loss harvesting involves selling investments that have declined in value to realize losses, which can then offset capital gains from other investments. This strategy reduces your overall tax liability without changing your long-term investment approach.
Data shows that this matters more than most investors realize. According to our research at Range, market volatility creates regular tax-loss harvesting opportunities, with significant market corrections occurring on average 3-4 times per year.
How Tax-Loss Harvesting Works
The mechanics are straightforward:
- Identify Investments with Losses: Review your portfolio for positions currently worth less than what you paid
- Sell to Lock In the Loss: When you sell the underperforming investment, you create a "realized loss" for tax purposes
- Reinvest Strategically: Purchase a similar (but not identical) investment to maintain your market exposure
This process creates a tax asset while keeping your investment allocation aligned with your goals.
The Tax Benefits
Tax-loss harvesting provides multiple ways to reduce your tax bill:
- Offset Capital Gains: If you've sold investments at a profit, harvested losses directly reduce those taxable gains—dollar for dollar
- Prioritize Short-Term Gains: Since short-term gains (assets held less than a year) are taxed at higher ordinary income rates, offsetting these first maximizes your tax savings
- Reduce Ordinary Income: If your losses exceed your gains, you can apply up to $3,000 annually against your regular income
- Bank Future Tax Savings: Any unused losses carry forward indefinitely, creating a "loss bank" for future years
Real Numbers: The Impact
Consider this scenario: You invested $20,000 in a technology ETF that dropped to $18,000. By selling, you lock in a $2,000 loss. If you also realized a $2,000 gain from another investment, the loss completely negates that gain for tax purposes.
For someone in the 37% tax bracket (highest for married filing jointly), this could save approximately $740 on short-term gains (37% federal rate) or $476 on long-term gains (20% rate plus 3.8% NIIT).
The Long-Term Value
Tax-loss harvesting isn’t just about managing taxes—it’s about maximizing your financial potential. With the right approach, you’re not only reducing what you owe the government; you’re reinvesting those savings to build long-term wealth.
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