Harvesting capital losses can be an important financial strategy during year-end tax planning. The tax-loss harvesting strategy applies to nonqualified (NQ) investment accounts versus a retirement account like a 401(k), IRA, or Roth IRA because losses realized in a NQ account qualify for tax deduction.
Tax-loss harvesting is the selling of depreciated securities at a loss to offset a capital gain tax liability or up to $3,000 of other taxable income.
Just because you can realize losses doesn’t always mean you should. If capital gains fall into the 0% capital gain tax bracket, no additional tax benefit will be received unless the losses fully exceed the gains. And even then, a tax deduction for excess losses is capped at $3,000.
When selling securities at a loss, the wash-sale rule may be applied if the same security is repurchased within 30 days of sale. Losses subject to the wash-sale rule are typically disallowed for current income tax purposes.
Realizing capital losses could impact other tax calculations that look at your Modified Adjusted Gross Income (MAGI), such as the taxation of Social Security benefits, the Premium Tax Credit, eligibility to contribute to Traditional or Roth IRAs.