NR CPAs & Business Advisors

What Is Tax-Loss Harvesting?

Tax-loss harvesting is the deliberate sale of a depreciated position in a taxable account to convert a paper loss into a realized capital loss the tax code recognizes. The paper loss on a position you still hold carries no tax value at all. The sale is the event that turns a decline in value into a deduction.A realized capital loss functions as a credit against realized capital gains.

How Much Can You Write Off With Tax-Loss Harvesting?

You can write off an unlimited amount of capital gains with harvested losses, plus up to $3,000 of ordinary income per year, or $1,500 if you are married filing separately. Those two limits behave very differently, and confusing them is the most common error in this area.The gain offset carries no ceiling whatsoever.

How Long Do You Have to Write Off Stock Losses?

You have an unlimited amount of time to write off stock losses, because capital loss carryforwards never expire for individual taxpayers. According to IRS Publication 550, the unused portion carries forward year after year until it is fully absorbed.Carried-forward losses retain their original character.

How Do Short-Term and Long-Term Losses Get Netted?

Short-term and long-term losses get netted against gains of the same type first, and only the surviving remainder crosses over to offset the other category. The ordering rule is mechanical, and it determines how much tax a given loss actually saves.The rate spread is what gives the ordering its weight.

What Happens to a Disallowed Loss?

A disallowed loss is not destroyed, because the amount attaches to the cost basis of the replacement shares and remains available when you eventually sell that position. The wash sale rule defers the deduction rather than eliminating it.The basis adjustment works arithmetically. Buy a stock at $50, sell it at $30 for a $20 loss, then repurchase at $25 inside the window.