By Hyejung Park, CPA

Tax loss harvesting can be a useful tool now as the stock market is recently down from its record highs. Given the market's long bull run, it is likely that people have not considered tax loss harvesting for a long time. Here are some quick tips about how to--  and how not to use this tactic. And note that tax loss harvesting does not apply to retirement accounts.

A few possible uses of tax harvesting are:
1) If you have realized capital gains early in 2020 or you want to reduce exposure to winning stocks, you can use tax loss harvesting to offset those gains by selling loss positions before yearend.  
2) Even if you have no capital gains, you can use your losses to offset your non-investment income up to $3,000 dollars. Losses in excess of $3,000 can carry forward to future years. In other words, losses do NOT have to be used in the year in which they are realized but can be saved for next year.

Important definitions and concepts to keep in mind:
Short-term losses apply to investments held for one year or less
Long-term losses apply to investments held for more than one year

Why do the above definitions matter?
Short-term loses must first offset short-term gains. Likewise, long-term loses must first be used to offset long-term gains. Once loses of one type of investment are higher than the gains of that type THEN they may be applied to offset gains from the other type.

In which type of situation should you use tax harvesting?
1) It is not advisable to sell off all stocks that have losses this year. Rather, use this period to evaluate which stocks are not worth keeping over the long-run. For instance, if a stock was struggling before the COVID-19 economic crisis, it probably will not do well afterwards. This might be a good time to take a smart loss and tax harvest. Do not just tax harvest for the sake of tax harvesting. 
2) Under IRS wash sale rules, if you sell a stock at a loss and later buy back the same stock in less than 30 days, tax harvesting likely will not apply. If you want to harvest losses and reinvest the proceeds within 30 days, you may select a similar but not identical position for reinvestment to avoid wash sale limits.