Year-End Tax Losses- Mistakes not to be made
Tax loss harvesting benefits by harvesting unrealized or unwanted tax, applying it against the capital gains compounding them from tax savings over a long period.
It’s an essential aspect of managing wealth because taxes can take a considerable part or percentage of your wealth if not managed not correctly.
You are avoiding the capital gains tax affecting the management of your profile from a risk perspective.
Tax loss harvesting is done at the financial year end as traders set off their realized profits against realized loss, reducing their net taxability. The general process that people use is-
- Know your potential rough gains in taxable accounts and other gained income, but only those accounts will included which are tax payable.
- Setting apart the stocks/bonds you hold shows the losses from the original investment. These become the candidates for tax balancing.
- Find a better-performing list of stocks in similar sectors.
- Execute buy and sell or sell and buy. The main goal is to stay in the market, not to free up the capital while harvesting tax losses.
Moreover, you can also tax loss harvesting to remove underperforming funds. The tax you need to pay on your mutual funds depends on how much you hold the funds.
However, if the holding is more than 365 days, the applicable tax will be different for equity-oriented and non-equity-oriented funds.
For example,
Consider that Mayank has realized profits of 9 lakhs on the stock exchange. While on the other hand, he has an unrealized loss of 4 lakhs. So he decided to sell the stocks and converted the unrealized loss into a realized loss. Mayank sets off his profit and loss, making his taxable income five lakhs.
Many people think it’s a loophole, but unfortunately, it’s a strategy to optimize tax returns (net). This is something that old rich folks have been doing for decades. Tax loss harvesting is the maximum golden opportunity to sell the loss and setoff gains.
Conclusion
Tax loss harvesting is not something that has to be ignored. Tax loss harvesting is when you close your position that you prefer to have open just to get a tax loss. All points of tax loss harvesting are used to reduce the tax liability in investments. As per some statistics, tax loss harvesting is not always beneficial since the assets you sell, and you recover more than your gains in taxes by booking losses. The tax credit is a real asset that can increase the amount of money you take from home. You can reverse the process because excess capital losses can carry forward to future years and be used to offset capital gains in coming years. At the initial stage, you should know and decide when to stop before entering the trade market. Tax loss harvesting is recommended only when you have high capital gains during the year. Before taking any decision, every trader should consult a chartered accountant.
