by mid November, the stock has fallen to a value of $9,000
The investor's income places them in a tax bracket where they pay
25% on marginal income. Selling the stock and "realizing"
the $1,000 net loss may allow them to deduct that loss from their
income, "saving" $250 on income tax [$1,000 loss * 0.25 tax rate = $250]
Here are a few important considerations and potential obstacles to employing a tax loss harvesting strategy:
- Does it make sense to give up all future benefit of an investment to capture the potential tax benefit of the sale? In the example above, is it likely that the $9,000 value will revert in the short term and turn into a $11,000 value and a $1,000 "gain"?
- Does your particular tax circumstance suggest this type of strategy?
- Be careful to understand "wash sale" rules. In general terms, a "wash sale" is one where a capital loss is disallowed because you repurchased the investment within 30 days of the sale.
- Be aware of the limits on counting realized capital losses within a given calendar year; "excess" capital losses may be applied to future years in some cases; be sure to consult with your tax professional on the relevant limits and rules.