Tax harvesting is a strategy that investors can use to harvest capital gains for tax savings. When tax harvesting, you sell investments that have risen in value and buy replacement investments with the proceeds. When harvesting your capital gains, it's important to make sure that you identify your investment goals, stay diversified, and rebalance your portfolio regularly.
Tax Harvesting: a strategy that you can use to harvest capital gains for tax savings
If you're an investor and want to reduce your tax liability, Tax Harvesting is a strategy that can help. Tax Harvesting involves selling investments at the end of the year to realize capital gains and then using those gains to buy replacement investments at a lower cost basis. This will allow you to defer taxes on any realized capital gains until later in life when they may be taxed at lower rates than current ones.
In order for this strategy to work, however:
- You must have enough money in taxable accounts (like stocks or mutual funds) where there are unrealized profits by December 31st of each year. Your brokerage firm must offer tax-deferred exchanges where they'll exchange one type of security for another without triggering any immediate tax consequences or requiring additional paperwork from you as long as both securities have comparable values according
Sell or Buy Investments
When tax harvesting, you sell investments that have risen in value and buy replacement investments with the proceeds. This could be stocks, mutual funds, or ETFs. The idea is to use your capital gains (the profit from selling an investment) to make additional purchases of other investments that are undervalued and therefore have more room for growth than your original ones did when they were purchased.
In addition to using this strategy at tax time, you can also choose to harvest your profits on a regular basis throughout the year by selling winners and reinvesting in new investments with those funds.
Identify Your Investment Goals
When harvesting your capital gains, it's important to make sure that you identify your investment goals, stay diversified, and rebalance your portfolio regularly. If you're using tax-loss harvesting, the goal is to minimize your capital gains. In this case, it's important to identify investments that have lost value in order to sell them off and realize losses on your taxes. If you're using the strategy as a way to diversify your portfolio and reinvest in other investments that have more room for growth than your original ones did when they were purchased, then it's important not to sell too many winners or else
When harvesting your capital gains, you will want to consider the following factors:
The cost basis of each security sold versus the sale price. This is important because the difference between a stock's original purchase price and its current value is known as "gain," which could be taxable if not offset by other losses or deductions. For example, if you bought 1 share of XYZ Company for $10 and it was worth $100 when you sold it last year, then your gain would be $90 ($100 - $10). However if instead, that same share was worth only $5 when sold today (and thus has lost 50% of its value), then technically there would be no taxable capital gains because there would be no actual profit earned from selling something that had already been losing value over time!
The cost basis of each security sold versus the sale price
When you sell a security, your capital gains tax is calculated based on the difference between your cost basis and sale price.
The cost basis of each security sold versus the sale price;
Your cost basis is simply how much you paid for an investment or asset at one point in time. For example, let's say you bought 100 shares of Apple stock five years ago for $50 per share ($5,000 total). Your original cost basis would be $5k because that was what it cost to buy those 100 shares at that specific time. Now let's fast forward five years later: The stock has risen significantly since then and now trades at $150 per share ($15k total). So now we have two scenarios:
- You decide to sell all 100 shares today (and thus realize any gains). In this case--assuming no other factors such as commissions apply--your profit would be simply calculated by subtracting what each individual share sold for ($150) from its original purchase price ($50), resulting in $100/share X 100 = $10k profit! Easy peasy lemon squeezy!
The amount of capital gains eligible for tax purposes
Short-term capital gains are any profits you make on investments you've held for less than one year, and long-term capital gains are profits made on investments held for more than one year. There are a few exceptions to this rule, but for the most part, it's fairly straightforward. Capital gains tax rates The rate of tax on capital gains depends on your ordinary income tax bracket.
Section 1031 Exchange Rules
If you want to defer paying taxes on any gain by selling one investment and exchanging it for another, then Section 1031 of the IRS code may be able to help.
This section allows you to trade certain types of property without being taxed on any gains made from the exchange. However, there are some rules that must be followed in order for an exchange to qualify under this provision:
- Both properties must be similar enough so as not to be considered completely unrelated; they must also have been owned by you or someone related to you when originally purchased (e.g., parents).
- The value of both investments must be equal or greater than their original purchase prices; this prevents people from taking advantage of depreciation deductions during their holding period while still being able to defer paying capital gains taxes until they sell their property later down the road--or never at all!
Use Infugro Financial Advisors' Tax Harvesting Calculator
Use Infugro Financial Advisors' Tax Harvesting Calculator to determine which assets can be best harvested for tax purposes.
How to use the calculator:
- Click on Infugro Calculator and enter your information into our secure online form. You will then be able to see what kind of savings potential you have based on your current portfolio, along with how much income tax will be saved by harvesting these gains (and if there are any losses). The results will show you how much money could be saved over time at various levels of risk tolerance and investment time horizons, so it's easy to see which option works best for each investor's needs!
Conclusion
Tax harvesting is a strategy that investors can use to harvest capital gains for tax savings. When tax harvesting, you sell investments that have risen in value and buy replacement investments with the proceeds. When harvesting your capital gains, it's important to make sure that you identify your investment goals, stay diversified, and rebalance your portfolio regularly. Use Infugro Financial Advisors' Tax Harvesting Calculator to determine which assets can be best harvested for tax purposes
Also Read: Retirement Planning with Your Financial Advisor: Strategies and Considerations - Infugro
