It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, you won’t want to miss it.

H Is For Harvesting Losses.

When it comes to the stock market, sometimes you win and sometimes you lose. It feels like losing should always be wrong – but it’s not. Selling losing stocks can be beneficial for tax purposes for those taxpayers who have sold winning stocks during the year (just as selling winning stocks can be beneficial for tax purposes for those taxpayers who have sold losing stocks during the year). Selling stocks or other investments that are losers to offset gains from winners is called harvesting.

You must first use losses to offset gains of the same kind (short term gains with short term losses, long term gains with long term losses). But if one kind of losses exceeds your gains of the same kind, then you may be able to apply the extra to the other. For example, if you realized a long term loss of $11,000 loss with just $5,000 in long term gains, you can use the “extra” $6,000 loss to offset short term gains.

Some quick definitions might be handy here.

  • Short term gains or losses are realized from sales (or other dispositions) of assets that you have owned for one year or less. Short term capital gains are taxed as ordinary income.
  • Long term gains or losses are realized from sales (or other dispositions) of assets that you have owned for more than one year. There are three long term capital gains brackets: 0%, 15% and 20%. The NIIT may also apply.

    But be careful: if you look at your financial statements and see that you’ve “lost” money, make sure that it’s a real loss. Even if your stocks tumbled hundreds or thousands of dollars, it means nothing to Uncle Sam unless you realized a taxable event (a sale of stock, death of an owner or other event that triggers a tax consequence). If that’s the case – and you have realized losses – you may want to offset those losses with gains (and vice versa). Keep in mind that there may be other, non-tax reasons for selling winning or losing stocks, but if you’re doing it as a tax strategy, make sure that you’re buying or selling stocks that make good tax sense.

For more Taxes A to Z, check out:

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Author

Kelly Erb is a tax attorney, tax writer and podcaster.

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