What is it and how does it work with capital gains?

tax loss harvesting: As an investor, you earn capital gains regardless of the assets you invest. These capital gains are a portion of your taxable income, depending on how long you have invested in the asset.

While you are earning good returns by trading or investing a significant amount of capital, there are times when you start to worry about taxes on those profits.

So what do you do if you don’t want to pay a lot of taxes on your capital gains? Is there any alternative to it?

Yes, there is a solution. Or better to call it a strategy to reduce taxes on such large amounts of capital gains. What is that? This is called tax loss harvesting. The idea of ​​tax loss harvesting is to reduce the taxes you have to pay on your investments.

But now you might be wondering what it is and how it works. To get all the answers, keep reading until the end to learn more about tax loss harvesting.

What exactly is tax loss harvesting?

Depending on how long you have held the asset, the tax you pay will depend on whether it is short-term capital gains (STCG) or long-term capital gains (LTCG). Just as you are taxed on the money you make (capital gains), you are also taxed on your losses. This is where tax loss harvesting comes in handy for investors, where taxes on losses offset taxes on gains.

Simply put, tax loss harvesting is the practice of selling stocks or funds at a loss to reduce taxes on income from capital gains.

This is a way to offset capital losses and capital gains by paying less tax.

So here, instead of paying tax on your entire capital gains, you only pay tax on your net profit i.e. the amount you gained minus the amount you lost.

But here’s the problem. You can indirectly reduce your taxes by taking a loss and selling stocks to offset your gains. However, once this is done, you will need to keep your investment game strong and purchase similar performing assets to diversify and balance your portfolio. And remember, long-term losses can only offset long-term gains, and so can short-term losses.

How are capital gains taxed?

Previously, LTCGs made by selling stocks or stock funds were completely exempt from tax. However, changes in the union budget have resulted in changes to the tax treatment of share sales and other investments.

From April 1, 2018, all LTCG for assets exceeding Rs. $100,000 not indexed in a financial year is taxed at 10%, and every STCG in shares is taxed at 15%.

How does tax loss harvesting work?

Suppose you earn Rs. 1.5 lakh from STCG this year. Because you are Rs. If you exceed the limit, you will have to pay tax if it exceeds 50,000 won. The tax you have to pay is 15% of the increment of Rs. 50,000 is approximately Rs. 7,500 is a lot of money.

But let’s say you own a few stocks and your unrealized loss is Rs. 40,000. So now what you can do is sell those shares to reduce your net STCG to Rs. 1.1 lakh (Rs. 1,50,000–Rs. 40,000). For this, you have to pay 15% tax of Rs. 10,000 and you only have to pay Rs. 1,500 in tax, saving Rs. 6,000 in taxes. That’s quite a savings, right?

This is tax loss harvesting. Sell ​​your stocks strategically to reduce your taxes and keep more in your pocket!

Have you ever tried tax loss harvesting?

Written by Shivani Singh

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