Kiss your poor investment goodbye and get a tax break for doing it: That's the idea behind tax-loss harvesting. It can be a smart move to make if you're holding on to an underperforming stock or fund and you're looking offset gains realized from selling another one of your investments.
The IRS allows you to claim a net loss of up to $3,000 each year (for single filers and married filing jointly) from busted investments — and it's usually a good idea to take full advantage. That $3,000 net loss could save you $720 in taxes at the 24% marginal tax bracket at the federal level and potentially further savings at the state level.
A write-off reduces any other capital gains you've earned during the tax year, and it's important to note that the deduction is a "net" loss. For example, you can earn $5,000 on one investment and lose $8,000 on another, and you can still claim the maximum $3,000 deduction.
Even if you can't claim the maximum $3,000 net loss, you can still reduce the value of your gains and save on taxes that way.
And if your losses spill over that $3,000 maximum? The IRS lets you push those extra losses into future tax years. So if your investments perform well next year and you realize some capital gains at that time, you can use prior unused losses to offset those future gains.
Some caveats:
Wash sales. Of course, the IRS has some restrictions in place to prevent you from gaming the rules on tax-loss harvesting. The most notable of these caveats is the "wash-sale rule," which prevents you from claiming a taxable loss and then immediately rebuying the security. And it holds for your spouse, too — one can't sell and claim the loss while the partner is buying in their own account.
Avoid selling just to get the tax break. It can be easy to sell an asset such as a stock only to get the tax break — a sure thing — while the future gain on the stock is anything but certain. But if you're holding the stock for its long-term potential, not just for this tax year, you might reconsider whether it's smart to sell for a capital loss.
