In every stock portfolio, you’ll find winners and losers. Some stocks make you money, while others might not perform as well and end up in the red.
Now, it’s common to want to cash in on the stocks that are in profits, but we often hold on to the ones in losses for longer, hoping they’ll turn around.
While you might want to avoid booking a loss on your investments, you can actually use these losses to reduce your taxes by doing tax loss harvesting.
So, what’s tax loss harvesting?
Tax loss harvesting is essentially using the losses from some of your investments to lower your tax liability.
When we talk about losses here, we mean unrealised losses—these are losses you haven’t actually realised by selling the stocks yet, but if you did sell them now, you’d be selling them for less than what you bought them for.
Here’s how it works:
- First off, you identify the investments that are currently in losses.
- Next, you sell these investments and book capital losses.
- Now, you can use these losses to offset any gains you’ve made from selling other investments. This means your net capital gains would be reduced and you’d have to pay lower taxes.
Now, if you believe those stocks you sold off will eventually bounce back, you can reinvest in them, keeping your portfolio intact.
For example,
Let’s say you made a capital gain of ₹90,000. Assuming these gains are short-term, you’d owe taxes at a 20% rate, totaling ₹18,000.
But if you decide to sell some stocks with unrealised losses of ₹40,000, your net gains for the year would come down to ₹50,000. That means your net tax liability reduces to ₹10,000, saving you ₹8,000 in taxes.
When should you do tax loss harvesting?
Well, you can technically do it anytime, but generally people tend to wait until towards the end of the financial year, around mid to late March. By then, you’ll have a clear picture of your gains for the year, making it easier to do loss harvesting and plan your taxes.
Now, before you get into tax loss harvesting, here are a few things to keep in mind:
- Long-term capital losses (holding period >12 months) can only be set off against long-term capital gains and not against short-term gains (holding period < 12 months).
- Short-term losses can be set-off against both LTCG and STCG.
- When you sell your holdings, they are settled in a FIFO (First in first out) manner. This means the stocks purchased first will be sold first. Hence, you should carefully consider the holding period of your investments before selling them as it might affect their set-off eligibility.
- Lastly, LTCL and STCL cannot be set off against any other income like dividends or gains from F&O and intraday trading.
Here’s a video for you!
