Previously I wrote about capital gains but I didn’t really cover capital losses or how they could benefit you.
What is a Capital Loss?
A capital loss is the opposite of a capital gain, where you have lost money instead of profited. Most people see capital losses as a bad thing but with the right management you can profit greatly from them.
What is Tax Loss Harvesting?
Tax Loss Harvesting is the act of selling a stock that is falling and buying a stock of equal value. You keep stock worth the same as what you had when you sold and you get to capture a loss equal to the amount your stock fell.
How does this benefit us?
This loss can be used to off-set your capital gains on your tax return at the end of the year and you can deduct loss greater than your earnings from capital gains up to $3,000 each year. Any loss greater than $3,000 after subtracting your capital gains will be carried over to future years.
Where does Betterment come in?
Betterment will automate this process for you and even import it to various tax software such as TurboTax to assist you in filing your taxes and getting the highest return possible at the end of the year.
Here’s a picture to show what Betterment can capture for losses that can benefit you.
Who should use Tax Loss Harvesting?
I would advise that anyone with a taxable investment goal who is making enough that they are required to pay long-term capital gains should have TLH enabled. This is anyone making over $37,000 if single or $75,000 if married. See here for the full tax bracket chart.
I’ve also started a subreddit, /r/BettermentInvesting, where you can find more posts written by me about investing in general and Betterment.