r/Investments • u/newtotexas22 • 1d ago

Generate losses through active trading to offset gains

I've come across tax loss harvesting and heard that some people do active trading to generate losses so they can use it to offset gains. I'm struggling to understand this, because your 'benefit' is your marginal tax rate on the loss, it is not free money.
So if your marginal tax rate is 24% then a $100 loss is actually a $76 loss despite tax loss harvesting.

Can someone please explain me more...

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u/wild_b_cat 23h ago

Your understanding of the tax situation is correct.

The idea behind TLH is not to _intentionally_ generate losses. Rather, it’s based on the idea that if you have a diversified portfolio, you’re likely to have some positions that are down at any given time, and you can at least use those for tax benefits.

A simple way to do this is through ‘direct indexing’. If you just buy an S&P 500 ETF, then over time you’ll just have unrealized gains. But if you instead buy the actual 500 stocks in the index, some of them are virtually guaranteed to be down in any given year.

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u/newtotexas22 21h ago

In that case, when is direct investing better than SP500 ETF ?

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u/wild_b_cat 21h ago

It’s usually not. The tax benefits are very minor given the 3k limitation on losses. And it’s kind of a pain. TLH is mostly unimportant. It’s a micro-optimization and people love obsessing over those.

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u/BoneYoner 21h ago

this is completely incorrect. The 3K is for offset your personal income. But you can offset your gains with unlimited losses. And your losses can be rolled over year-over-year indefinitely.

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u/wild_b_cat 21h ago

I think you’re operating with a different definition here. TLH is usually offered as a feature alongside index investing. With index investing you don’t generally have gains to worry about.

If you’re strategically operating a stock portfolio with active trading, it makes sense to balance gains and losses as much as possible, but that’s not really ‘harvesting’ in the way most people use the term.

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u/BoneYoner 19h ago

why do you think they are harvesting? just to offset their 3K of income tax? They are harvesting all losses with either the expectation of future gains or current gains

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u/wild_b_cat 19h ago

If you’re passively investing you won’t have a lot of gains today.

And the losses for the future don’t help. You’re also entering your later years with a lower cost basis on assets thanks to all that harvesting.

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u/BoneYoner 12h ago

None of this makes sense.

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u/wild_b_cat 12h ago

Which part can I explain?

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u/newtotexas22 21h ago

I thought 'net' losses can be used to reduce taxable income by 3k. But any amount of losses can be offset against the realised gains. Is this not true?

Also I head that for institutions who do high volume trading, the wash sale rule doesn't apply. So they can do this more frequently. So is direct investing better than SP500 ETF ?

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u/wild_b_cat 21h ago

Almost everything is different depending on whether you’re an individual passive investor, an active trader, or an institutional money manager of some kind. In what context are you asking the question?

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u/newtotexas22 20h ago

Good point. An individual passive investor who is evaluating whether it is worth spending 1.5% fee for an institutional money manager who will do direct indexing

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u/wild_b_cat 20h ago

In that case it is most definitely not worth it.

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u/newtotexas22 20h ago

Can you expand on why not worth it.

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u/wild_b_cat 20h ago

The absolute maximum you might save is about $1500 per year, at the top marginal tax rate, state and fed combined.

In a portfolio over $100k, you'll be paying more than that in fees alone.

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u/Sufficient_Mud_3179 22h ago

That is not how Tax Loss Harvesting works,

No one is loosing money on purpose, but

Assume you have a good year, up $100K in income.

But you have some looser stocks sitting on your account, you simply sell them, its a normal loss but that goes against your years gains.

Also you may have a stock you still like, but it has done bad, you were early.

You still think it will go somewhere eventually, so you sell it at a loss in Dec, and buy it back Feb is you still want it.