WHAT IS TAX LOSS HARVESTING AND HOW CAN IT CUT YOUR TAX BILL

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Even great investors like Warren Buffett and Peter Lynch sometimes buy losing stocks that only seem to go down.

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To be a profitable investor, you only have to buy more winning securities than losing securities, but inevitably there will be capital losses in any investor’s portfolio.

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While having a diversified portfolio will help minimize your portfolio’s risk, don’t become discouraged if you pick some bad companies. Fortunately, a losing investment doesn’t have to be all negative.

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What Is Tax Loss Harvesting?

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In short, you only need to pay taxes on your net profit, or the amount you gained minus the losses, thus lowering your tax bill.

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Tax-loss harvesting is a strategy most investors employ when evaluating their portfolios’ annual performance and its effects on taxes.

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Selling an underperforming investment allows you to offset the gains made on other assets. You can use the tax-loss harvesting approach and get considerable tax savings.

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Before using tax-loss harvesting, you must know how capital gains taxes operate. An investor earns a “realized” taxable capital gain when they sell an investment in a taxable account for more value than what they spent.

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