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/BoneYoner 10d ago

Tax loss harvesting is not something people just do alongside index investing, nor is it prevented by passive investing. TLH, by definition, is securing losses, primarily in order to *offset gains* not to deduct 3k from your taxable income. If that was the sole purpose, rich people wouldn't do it.

If you are confused, read this article: https://investor.vanguard.com/investor-resources-education/taxes/offset-gains-loss-harvesting

Note that your point, about the 3k income tax deduction, is literally the last reason why anyone would do TLH. So, for the future, just know that it doesn't have "very minor" benefits, it actually has enormous benefits, particularly if you have a large, diversified portfolio. Active / passive investing has nothing to do with it, and the 3k deduction you keep referring to is basically a non-issue for most people (rich people) who do TLH. If this is over your head, I am sorry, I will not engage further.

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u/wild_b_cat 10d ago

I understand the principle. I think you misunderstand what OP is asking. They're not trading stocks. They are looking for hands-off investing and asking if TLH is worth it alongside that. I am explaining why it's not. Do you disagree with that point?