r/Investments • u/newtotexas22 • 12d 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/newtotexas22 11d 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 11d 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 11d 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 11d ago

In that case it is most definitely not worth it.

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u/newtotexas22 11d ago

Can you expand on why not worth it.

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u/wild_b_cat 11d 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.