What is tax-loss harvesting?

Profits from the sale of capital assets are taxed as long-term capital gains (LTCG) or short-term capital gains (STCG) depending on how long the asset has been held. Tax-loss harvesting is a smart tax planning strategy that can reduce the tax on such profits to some extent.

When you sell some assets at a loss to offset profits made by selling other stocks at a profit, this is known as tax-loss harvesting. As a result, you only pay taxes on your net profit, or the difference between what you earned and what you lost, lowering your tax burden.

Investors can recoup their losses by selling their failing assets and investing the money in similar ventures that may grow over time. These future gains can then be offset by future losses, creating a virtuous tax savings cycle.

A quick reminder: When you sell an investment asset for a profit, you must pay capital gains taxes on the profits, which are calculated based on how long you owned the asset. If you owned it for less than a year, any gains will be taxed at your regular income tax rate. If you keep it for more than a year, you'll be subject to the preferential long-term capital gains rate, which can be as low as 0% but never exceeds 20%, even for the highest earnings.

Remember that sales transactions must be completed before the end of the tax year if you want to harvest losses and reap the benefits they provide. If you wanted to harvest losses from 2020, for example, the transactions required to be completed by December 31, 2020.