Nobody likes to lose money on their investments. But when it comes to taxes, you can sometimes win by losing.
“Make lemonade out of lemons,” says Eric Bond, founder of Bond Wealth Management in Long Beach, Calif. “It’s a tax break.” Be aware of holding periods when taking advantage of tax-loss harvesting because you need to match like-for-like gains and losses, says Jonathan Lee, a St. Louis-based senior portfolio manager at U.S. Bank. A short-term loss offsets a short-term gain while a long-term loss offsets a long-term gain—though losses of either variety can reduce your taxable ordinary income.
Still, while harvesting may appear relatively simple—like using losses on one stock to offset the gains on another one—in reality things can quickly get a lot more complicated.: You buy $15,000 worth of stock A and $15,000 worth of stock B and sell both holdings in entirety after more than a year to reap a $10,000 profit on the sale of stock A and a $5,000 loss on stock B.
If you sell an investment at a loss, IRS rules dictate that you must wait at least 30 days before buying that same or a “substantially similar” asset again. The 30-day rule spans the period both before and after you sell the asset. “I tell people: ‘Go a couple extra days, just in case,’” says Bond.