Meridian Blog

Capital gains taxes are a consideration when buying and ultimately selling assets. For this post, we will focus on stocks, but capital gains taxes apply to real estate and other assets as well.

Put simply: you buy a stock, it increases in price, and you sell it at a higher price. The difference between your purchase amount and the selling price is called a capital gain.

For example:

• You buy 100 shares of MFP* at $10 per share = $1,000 purchase amount.
• You sell 100 shares of MFP at $15 per share = $1,500 sale amount.

Federal (and state, if applicable) taxes must be paid on the $500 capital gain, and the tax is due by the tax filing deadline for that year.

Most people want to pay as little tax as possible, and there is a strategy available to investors to help offset (not eliminate!) taxes from capital gains. The blog title already spoiled it; tax loss harvesting.

What is Tax Loss Harvesting?

In short, tax loss harvesting involves intentionally selling a holding at a taxable loss. As investment managers, we are quick to note that this usually does not mean we no longer think the holding will increase in value (we weren’t wrong, we were just early!). In most cases, we will buy back the same security after waiting the requisite 30 days to realize the loss. If you sell a security and buy it back within 30 days, you cannot realize the loss (this is known as the wash-sale rule).

During the 30-day period, we will typically buy a replacement security. For example, if we sell Verizon stock at a loss, we might purchase AT&T stock to hold during the 30-day waiting period (or maybe an ETF with exposure to the telecom industry). This is to take advantage of any gains that might occur within the industry as a whole, and a replacement security will often behave in a similar manner to the original stock.

Download the full PDF

What-Issues-Should-I-Consider-When-Harvesting-Capital-Losses-2024

Benefits of Tax Loss Harvesting

Lastly, there is no case that I can think of where an investor has ended up with LESS money after paying capital gains taxes. Generally speaking, if you are paying a capital gains tax, it means that your investments have gone up in value, which is the whole point! Tax loss harvesting can help, but eventually if you want to sell something at a gain and spend the proceeds, you will owe some tax. I think that many investors fear capital gains, because it feels like a negative come tax time. They have to take money out of a checking or savings account in order to pay the tax. We like to remind people that they can use funds from the investment account that went up in value to help pay the tax vs. taking money out of an operating/checking account.

That said, whenever possible, we do try to offset our clients’ capital gains by intentionally taking some losses to offset gains.

To learn more about tax loss harvesting and its potential impact on your investments, check out this detailed guide on tax loss harvesting from NerdWallet.

Rosie (aka Munchie) contemplating her tax loss harvesting strategy

*Meridian Financial Partners’ fictional stock symbol 😊