What is Tax Loss Harvesting?

Tax Loss Harvesting: Offset realized capital gains with unrealized capital loss to reduce your tax bill!

We have seen a rise in people investing in shares & securities. But part of having a well-diversified portfolio is accepting the reality that while some stocks perform well, you always pick a few duds. This means, not every investment we make can yield profits. Fortunately, investments making losses can have a silver lining: these losses can be used to lower the overall tax liability, putting one’s portfolio in a better position.

What is tax loss harvesting?

Tax-loss harvesting is the practice of selling stocks to realize losses, re-invest those proceeds and hence reduce taxes.

How does it work?

Majority of the investors use this strategy usually at the end of the financial year. But, this strategy can be used all around the year to better plan the capital gains.

Tax Loss Harvesting begins with the sale of investments that have consistently seen a decline in their prices. Once this loss is realized, it can be set off against the capital gains earned on the portfolio over the period.

For better understanding, let’s say Muskan has an STCG of ₹90,000, then she is liable to pay a tax @15%, i.e, ₹13,500.
She holds some stocks that are not performing well and hence have an unrealized loss of ₹50,000. If she sells these stocks and re-invests the same in a similar stock, she can reduce her STCG to ₹40,000. In this case, the tax to be paid will be 15% of ₹40,000, ie, ₹6000, resulting in a tax saving of ₹7,500.

Things to keep in mind

When we set off losses using tax loss harvesting, remember that:

  1. LTCL can only be set off against LTCG, meaning, LTCL cannot be set off against STCG.
  2. STCL can be set off against both STCG or LTCG
  3. Know about the Wash-Sale Rule (applicable outside India), which states that if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale, the loss is typically disallowed for current income tax purposes.

Read more about Tax Loss Harvesting for Stock Traders - Learn by Quicko

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