Offsetting gains through tax-loss harvesting | Vanguard (2024)

FAQs

How much can you offset with tax-loss harvesting? ›

Tax-loss harvesting is the timely selling of securities at a loss to offset the amount of capital gains tax owed from selling profitable assets. An individual taxpayer can write off up to $3,000 in net losses annually.

If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040), Capital Gains and Losses.

In fact, capital losses can be utilised to offset capital gains from the sale of other assets. We can do this by deducting the capital loss amount from any other capital gains achieved within the same financial year, thus reducing overall capital gains tax liability.

The three steps in the tax-loss harvesting process are: 1) Sell securities that have lost value; 2) Use the capital loss to offset capital gains on other sales; 3) Replace the exited investments with similar (but not too similar) investments to maintain the desired investment exposure.

All investing is subject to risk, including the possible loss of the money you invest. Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts.

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.

Deduction of Capital Losses

If you have capital losses that exceed capital gains in the current year, you have a net capital loss. You can (but don't have to) carry back the net capital loss to any of the 3 preceding taxation years to be deducted against taxable capital gains in those years.

Deducting Capital Losses

If you don't have capital gains to offset the capital loss, you can use a capital loss as an offset to ordinary income, up to $3,000 per year. If you have more than $3,000, it will be carried forward to future tax years." Here are the steps to take when it comes to tax filing season.

If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.

Can I offset losses against capital gains tax? ›

Losses made from the sale of capital assets are not allowed to be offset against income, other than in very specific circ*mstances (broadly if you have disposed of qualifying trading company shares). You cannot claim a loss made on the disposal of an asset that is exempt from capital gains tax (CGT).

If the net amount of all your gains and losses is a loss, you can report the loss on your return. You can report current year net losses up to $3,000 — or $1,500 if married filing separately. Carry over net losses of more than $3,000 to next year's return. You can carry over capital losses indefinitely.

No capital gains? Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).

With Schwab Intelligent Portfolios, automated tax-loss harvesting is available for accounts with at least $50,000 in investable assets.