2024 Long-Term Capital Gains Tax Rates
| Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 0% | $0 – $47,025 | $0 – $94,050 | $0 – $47,025 | $0 – $63,000 |
| 15% | $47,026 – $518,900 | $94,051 – $583,750 | $47,026 – $291,850 | $63,001 – $551,350 |
| 20% | $518,901+ | $583,751+ | $291,851+ | $551,351+ |
How Capital Losses Can Offset Gains
Investing in the stock market inherently involves both potential gains and the risk of losses. However, not all losses need to be viewed negatively if managed strategically through tax-loss harvesting. This method involves the deliberate selling of securities at a loss to offset a corresponding gain, which can help reduce the overall tax liability.
Short-term losses are first used to offset short-term gains. If short-term losses exceed the gains, the remaining loss can be applied against long-term gains. Conversely, long-term losses are first applied against long-term gains.
Notably, if an investor’s total realized losses exceed their total gains, the IRS allows up to $3,000 of this excess loss to be deducted against other types of income annually, with the possibility of carrying forward unused losses into future tax years.
Example of Tax-Loss Harvesting
Let’s take the example of an investor who has the following losses and gains within the same fiscal year:
- $5,000 short-term loss
- $2,000 short-term gain
- $7,000 long-term gain
Our hypothetical investor chose to sell a short-term investment at a $5,000 loss to reduce net gains of $9,000 ($2,000 on another short-term investment and $7,000 on an investment that they held for six years before selling).
First, the $5,000 short-term loss will offset the entirety of his $2,000 short-term gain. For tax purposes, he has $3,000 in remaining short-term losses that he can apply against his $7,000 long-term gain. As a result, he’ll pay long-term capital gains tax rates on just $4,000.
It’s important to note that while tax-loss harvesting can be a beneficial strategy, its effectiveness depends on individual circumstances and market conditions. Additionally, there are rules and limitations, such as the wash-sale rule, which prevents investors from claiming a tax deduction for a security sold at a loss and repurchased within 30 days.
Bottom Line
Tax-loss harvesting is a strategy that uses investment losses to offset investment gains realized in the same year. Short-term losses must first be applied to short-term gains. Then, the remaining short-term losses can be used to offset long-term gains. If total losses exceed total gains, the IRS allows investors to deduct up to $3,000 from their other forms of income, further reducing one’s tax liability in a given year.
Portfolio Tax Tips
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