Tax-loss harvesting lets freelancers with investment accounts reduce their tax bill during high-income years. Learn how it works and when it makes sense to use it.
Tax-loss harvesting is the practice of selling investments that have declined in value to realize a loss, then immediately reinvesting in a similar (but not identical) asset. The realized loss offsets gains elsewhere, reducing your tax bill.
You bought $10,000 of VXUS in January. By October it is worth $8,500. You sell it, realizing a $1,500 capital loss.
You immediately buy a similar but not identical fund (say, SCHF — a different international ETF) to maintain your market exposure.
The $1,500 loss offsets $1,500 of capital gains from other sales. At 15% capital gains tax rate, this saves you $225.
You cannot buy the same or substantially identical security within 30 days before or after the sale. This is why you buy a similar but different fund. VXUS (Vanguard international) and SCHF (Schwab international) track different but correlated indexes.
If you have a high-income year (consulting project, product launch), tax-loss harvesting in your brokerage account offsets gains that would otherwise be taxed at 15-20% capital gains rates.
This is an advanced strategy best implemented with tax software (TurboTax handles it) or a tax professional.
If you are in the 0% capital gains bracket (income under approximately $47,000 for single filers in 2024), tax-loss harvesting provides minimal benefit.
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