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Tax Harvesting

Tax-loss harvesting is a practice of selling a security that has incurred a loss to help investors reduce or offset taxes on any capital gains income subject to taxation. This practice is accomplished by harvesting the loss.

How Tax-Loss Harvesting Works?

  • How Tax-Loss Harvesting Works

Tax-loss harvesting is also referred to as tax-loss selling. Most traders use this strategy at the end of the year after they examine the yearly performance in their portfolios and its effect on their taxes. An investment that indicates a loss in value may be sold to assert a credit towards the earnings that were found out in different properties.

Tax-loss harvesting is a device for decreasing basic taxes. A loss inside the value of Security A can be sold to offset the boom in the price of Security B, for this reason, disposing of the capital gains tax liability of Security B. Using the tax-loss harvesting approach, investors can recognise giant tax savings.

Offset Gains and Losses

  • Offset Gains and Losses

Once you have got realised the losses, you may use them to offset capital gains from different investments. For example, in case you take advantage of INR 40,000 in one inventory and a lack of INR 20,000 in every other, you may offset these and most effectively pay tax at the internet gain of INR 20,000.

Reporting and Documentation

  • Reporting and Documentation

All transactions made for tax-loss harvesting have to be pronounced appropriately whilst filing tax returns. It is critical to hold precise facts of all transactions, along with the date of sale, buy, and the quantities worried.

    • Understanding Tax Implications

    It is vital to understand the tax implications of each transaction. For instance, long-time period losses can only be prompt against long-time period gains, and now not towards short-time period profits. Timing Your Transactions. The effectiveness of tax-loss harvesting in large part depends on the timing of your transactions. The quit of the financial year is an essential time when maximum traders appear to harvest losses. However, opportunities can arise whenever, and staying vigilant is prime.

    • Portfolio Rebalancing

    While tax-loss harvesting, it's far essential to keep the wider perspective of portfolio rebalancing in mind. Selling an asset at a loss should align with your typical investment approach and lengthy-time period goals


    For Example

    If an individual earns ₹1 lakh in Short-Term Capital Gains (STCG) this year, they must pay 15% of this amount as taxes, which amounts to ₹15,000.

    Additionally, if the individual holds stocks with an unrealized loss of ₹60,000, they can sell these stocks to reduce their net STCG to ₹40,000. This would require paying 15% of ₹40,000, which amounts to ₹6,000 in taxes, resulting in a tax savings of ₹9,000.

    This process of selling stocks to harvest losses and save on taxes is known as tax-loss harvesting.