Taxes Tax Planning What Is Tax Selling? Tax Selling Explained in Less Than 5 Minutes By Robin Hartill Robin Hartill Robin Hartill is a Certified Financial Planner (CFP) who writes about money management, investing, and retirement planning. She has written and edited personal finance content since 2016. Robin currently leads The Penny Hoarder's personal finance advice column, "Dear Penny." Through this platform, Robin answers the questions of readers from across the United States. She decodes industry jargon, making complicated finance topics like paying taxes, managing a portfolio, and boosting a credit score easy to understand. learn about our editorial policies Updated on January 31, 2022 Reviewed by Eric Estevez Reviewed by Eric Estevez Eric is a duly licensed Independent Insurance Broker licensed in Life, Health, Property, and Casualty insurance. He has worked more than 13 years in both public and private accounting jobs and more than four years licensed as an insurance producer. His background in tax accounting has served as a solid base supporting his current book of business. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article Definition and Examples of Tax Selling How Tax Selling Works What It Means for Individual Investors Definition Tax selling is the practice of selling losing assets to reduce capital gains taxes. Because you can offset your losses against your gains, tax selling can lower your overall tax bill. This means that even when an investment loses money, you may be able to use it to your advantage through tax selling. Photo: Korrawin Khanta / EyeEm / Getty Images Tax selling is the practice of selling losing assets to reduce capital gains taxes. Because you can offset your losses against your gains, tax selling can lower your overall tax bill. This means that even when an investment loses money, you may be able to use it to your advantage through tax selling. Definition and Examples of Tax Selling When you sell an investment for a loss, you can use your losses to reduce your capital gains on profitable investments. Tax selling is a strategy that investors use to minimize their taxes by selling some stocks at a loss to offset capital gains. Alternate names: Tax-loss harvesting, tax-loss selling For example, suppose you sold Stock A for $10,000 more than you paid for it after holding that stock for a year. Let’s say you also sold Stock B more than a year after you purchased it, but at a $6,000 loss. Because of the tax selling rules, you’d only owe long-term capital gains taxes on $4,000 because you’d deduct your losses from your gains. If, instead, you sold Stock A for a $10,000 loss and Stock B for a $6,000 profit, you’d have a $4,000 capital loss. You could deduct $3,000 of the loss from your income for the year. Then, you could use the remaining $1,000 to reduce a future year’s capital gains. Or you could carry forward the entire $4,000 loss for future tax years. Note Use IRS Form 8949 with Schedule D to report capital gains and losses on most assets, including stocks, bonds, and real estate. How Tax Selling Works When you sell an asset, find the sale price and subtract the adjusted basis (the amount you paid for the asset plus a few additional costs). This will determine whether you have a capital gain or a capital loss. The amount you pay in capital gains taxes depends on how long you’ve held the asset as well as your taxable income. If you sell an asset you’ve held for less than a year, it’s treated as a short-term capital gain or loss. Any profit made in short-term gains is taxed as regular income in ordinary income-brackets, which are as high as 37%. An asset you sell after holding for more than a year will result in a long-term capital gain or loss. Tax brackets for most long-term capital gains are taxed at 0%, 15%, or 20% based on your income. Depending on your financial situation, you may be able to use your long-term capital losses to offset your long-term capital gains—and your short-term capital losses to offset your short-term capital gains. Then, you can use your long-term capital gains and losses to offset their short-term counterparts, or vice versa. If your capital losses are higher than your capital gains in a certain year, you can deduct a loss of up to $3,000, or $1,500 if you’re married and filing separately from your spouse. Note You can also carry forward a capital loss and use it to reduce your taxable income in a future year. What It Means for Individual Investors You don’t have to worry about capital gains or tax selling for tax-advantaged accounts such as a 401(k) or an individual retirement account (IRA). That’s because you earn all capital gains, dividends, and interest tax-free until you withdraw the money. For traditional accounts, the money is taxed as ordinary income when you withdraw it. With Roth accounts, though, you generally won’t owe taxes because you’ve contributed post-tax money. Tax selling may be most effective when you’re using short-term losses to offset short-term gains. Using short-term losses to offset long-term gains may not be a good strategy because your tax rate is lower on long-term gains. It may be a better tactic to use short-term losses to offset regular income or carry them forward to another year. Discuss your options with a financial adviser to make the right decision for your situation. If you’re using tax selling, it’s important to be aware of the IRS rules that prohibit wash sales. A wash sale occurs when you sell an investment at a loss and then buy the same investment or one that is “substantially identical” to it 30 days before or after the trade. If the IRS considers the transaction a wash sale, you won’t be allowed to use it to lower your taxes. Key Takeaways The tax selling process occurs when investors sell assets at a loss to offset capital gains, thereby reducing their income tax liability in a given year.Tax selling makes the most sense when you’re offsetting short-term losses against short-term gains. This is because short-term capital gains are usually taxed at a higher rate than long-term capital gains.A wash sale occurs when you sell an investment at a loss and then purchase the same or “substantially identical” investment within 30 days before or after selling. Wash sales are precluded from tax deductions. The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Instructions for Form 8949 (2020)." Accessed Nov. 3, 2021. IRS. "Topic No. 409 Capital Gains and Losses." Accessed Nov. 3, 2021. IRS. "Publication 550 Investment Income and Expenses (Including Capital Gains and Losses)," Page 59. Accessed Nov. 3, 2021. Securities and Exchange Commission. "Wash Sales." Accessed Nov. 3, 2021.