Tax-loss harvesting is the selling of securities at a loss with the intention of using these losses to offset current and future capital gains. Losing money on an investment, at the surface, is not ideal; however, a loss can be utilized to reduce the overall liability on other winning investments, while still putting the proceeds to good use elsewhere. 

For example, consider a single individual with $150,000 of wage income, and two stocks: A with a $10,000 long-term capital gain and B with a $10,000 long-term capital loss. At this level of income, the sale of stock A would cause a $1,500 tax liability ($10,000 times 15% capital gains rate). If stock B is also sold, the tax liability on the gain from the sale of stock A would be reduced to $0.

Now consider an identical scenario, except where the long-term capital loss on stock B is $13,000. In this case, not only would the sale of stock B eliminate the tax on the capital gain from stock A, but up to $3,000 of the reamining loss can offset ordinary income. For an individual with $150,000 of wage income, this results in a tax savings of approximately $720 ($3,000 times the 24% ordinary marginal tax bracket).

In a situation where an individaul has recognized short-term capital losses but is also interested in selling their unrealized long-term capital gains, it may be best to hold off on doing so to prevent using the short-term (and more valuable) capital loss gainst an income type taxed at the lower 15% or 20% rate. As a reminder, any unused capital losses after applying $3,000 to ordinary income can be carried forward to use in future years.

Robert W. Baird & Co. Incorporated. Baird nor the Stevanovic Metz Group provide tax advice. Contact your tax professional.