Tax-Loss Harvesting

If investments you sold in 2024 lost money, you may find some solace in the IRS tax code. You can deduct certain losses from your taxable income — called tax-loss harvesting — when you understand the rules. Here they are briefly:

TERMS DEFINED

For starters, the IRS has separate tax rates for long-term investments — those which you have held for at least a year. The capital gains tax rate on net realized long-term investment gains, or capital gains, is 15% for most people.

You realize losses and gains only on investments you sell, not on those you still hold. Investments held for a year or less trigger ordinary income tax rates, which are typically higher. The IRS taxes some or all net capital gains at 0% if your income is low enough. You'll pay 20% on net capital gains if your taxable ordinary income exceeds $518,900 if filing as a single, $583,750 if filing jointly, $551,350 if filing as head of household, and $291,850 if married and filing separately.

THE CALCULATION

To figure net losses, subtract what you realized from selling your investment from the original amount invested and then deduct any sales charges. If your realized capital losses are greater than realized capital gains, deduct up to $3,000 a year for individuals and married filing jointly or up to $1,500 if married and filing a separate return. You may carry forward any losses over this annual cap to future years.

LONG-TERM VIEW

Don't sell investments just for tax reasons. Keep those that lost money last year if they continue to have long-term prospects and sell winners if they don't fit your investment strategy.