Tax Loss Harvesting | How to Use Losses to Offset Gains

Tax-loss harvesting is the process of selling an investment at a loss, and replacing it with a similar investment.

For example, selling AT&T at a loss and buying Verizon, swapping Delta Airlines for Alaska Airlines, Coke for Pepsi, Home Depot for Lowes (you get the picture). These are not recommendations for individual stocks...

But why would someone do this? Realized losses can be used to offset realized gains. And if done correctly, the stock (or basket of stocks) that was purchased has a history of correlating highly with the stock (or basket of stocks) that was sold to minimize the risk of lost returns.

Watch this video to learn more!

Transcript:

On this video, we are going to be talking about tax loss harvesting. I'm Chris Kaminski, co-founder and partner of Consilio Wealth, where we specialize in working with tech professionals specifically at Amazon, Microsoft, Meta, and Google.

Tax-loss harvesting is a process where you would sell a stock that is at a loss and buy a similar stock to replace it. Let's say for example, you own AT&T and AT&T is down 10%. You could sell AT&T to book that loss and you would buy say Verizon as a similar replacement or another example could be Delta Airlines for Alaska Airlines, Coke for Pepsi, Home Depot for Lowe's. You get the picture.

The risk in doing this is the thing that you sold and the thing that you bought might not correlate perfectly and the problem with that is, let's say that you sold Home Depot and you bought Lowe's, and the next day, some news came out about Home Depot, and it jumped up 10% and Lowe's stayed flat. So, you do run the risk of the thing that you bought underperforming, or on the good side, it could outperform the thing that you sold but the point here in concept is, you can use losses to offset gains later on.

Let's say that you do this throughout the year, and you have $10,000 in losses built up. You can use those against future gains when you sell things that did have gains. You can also use those against gains in other accounts. Let's say, for example, you work at Microsoft, and you have a lot of concentrated stock in your own company stock. Microsoft's been doing well recently, so you have a lot of gains in that stock. You want to sell some, but you don't want to pay the tax. Sound familiar? You sell, you book a $25,000 capital gain. You can use your $10,000 capital loss from this example to offset the $25,000 capital gain and your net is only $15,000 of capital gains, which is then taxed. So, the goal of this is to become more tax efficient over time to offset gains with losses at a high level.

We will do this at the fund level. So, I did give you some stock examples, clearly doing it at the stock level could create some risk because like I said, the thing that you bought might not do as well as the thing that you sold, or it could do better, but at the fund level, if you're say selling the S&P 500 and you're buying the Russell 1000, or you selling a dividend growth fund for a similar, but different dividend growth fund, you know, that would qualify for tax losses.

It is worth noting that the IRS requires a substantially different definition. So, you cannot just simply sell your S&P 500 fund that say is manufactured by Vanguard and go by the same exact S&P 500 fund that is manufactured by Fidelity. That won't work. That won't qualify as a definition. You have to change or be substantially different.

There's a whole other video that we'll release on wash sale rules, but as of now, we're just talking about tax-loss harvesting. That's it. Hope this video was helpful.