How can I use tax-loss harvesting to reduce my tax liabilities from stocks?

Tax-loss harvesting is a strategy where you sell loss-making stocks to offset gains from profitable investments, reducing your overall tax liability. By strategically realizing losses, you can lower taxable gains and optimize your portfolio returns. This method helps investors save on taxes while staying invested in the market.

What Is Tax-Loss Harvesting?

Tax-loss harvesting involves selling stocks that have declined in value to offset capital gains from other investments. It helps investors legally reduce their tax burden and reinvest the proceeds into better-performing assets.

Example of Tax-Loss Harvesting

Suppose you made a ₹1,00,000 profit from selling a stock but also have another stock with a ₹30,000 loss. If you sell the loss-making stock, you only need to pay tax on the ₹70,000 net gain instead of ₹1,00,000, reducing your tax burden.

Benefits of Tax-Loss Harvesting

• Reduces Capital Gains Tax: Offsets taxable gains with realized losses.
• Improves Portfolio Efficiency: Frees up capital for better investments.
• Offsets Future Gains: Carry forward excess losses to reduce future taxes.
• Enhances After-Tax Returns: Keeps more of your investment gains.

How to Use Tax-Loss Harvesting

1. Identify Underperforming Stocks

Review your portfolio and find stocks with unrealized losses.

2. Sell the Loss-Making Stocks

Sell these stocks to realize the capital loss, which can offset taxable gains.

3. Reinvest in Similar Assets

Ensure compliance with tax rules while reinvesting in stocks with growth potential.

4. Declare Losses on Your Tax Return

Use capital losses to lower tax on capital gains when filing your tax return.

Key Considerations Before Using Tax-Loss Harvesting

• Wash Sale Rule: Avoid repurchasing the same stock within 30 days to maintain tax benefits.
• Short-Term vs Long-Term Gains: Understand how losses apply to different tax brackets.
• Portfolio Rebalancing: Ensure you don't sell fundamentally strong stocks just for tax savings.
• Market Timing: Make investment decisions based on long-term goals rather than tax benefits alone.

Tax-loss harvesting is a smart way to manage your stock investments efficiently while reducing tax liabilities. By selling loss-making stocks and reinvesting wisely, you can save on taxes and improve portfolio performance. However, always consider long-term financial goals before making investment decisions.