Tax Selling Definition

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Tax Selling Definition

What Is Tax Selling?

Tax selling is a sort of transaction in which an investor sells a capital loss asset in order to reduce or eliminate the capital gain earned by other assets for income tax reasons. Tax selling helps the investor to avoid paying capital gains tax on assets that have recently been sold or increased in value.

Key Takeaways

  • When an investor sells an asset at a capital loss in order to reduce or eliminate the capital gain achieved by other assets for income tax reasons, this is known as tax selling.
  • A wash sale occurs when an investor sells an item via a broker to realize a loss and then repurchases the identical asset from another broker within 30 days of the transaction.
  • The IRS prohibits wash sales.

Understanding Tax Selling

Tax selling is the practice of selling stocks at a loss in order to lessen the capital gain achieved on an investment. Because capital loss is deductible, it may be used to offset capital gains, lowering an investor’s tax obligation.

Assume an investor made a $15,000 capital gain on the selling of ABC shares. They are in the highest tax rate and will have to pay the government 20% capital gains tax, or $3,000 in total. But suppose they sell XYZ stock for a $7,000 loss. Their net capital gain for tax purposes will be $15,000 – $7,000 = $8,000, resulting in a $1,600 capital gains tax bill. Take note of how the realized loss on XYZ decreases the gain on ABC, lowering the investor’s tax burden.

  What Is a Tax-Free Savings Account (TFSA)?

Because losses are tax deductible, investors may sell at a loss, deduct the loss, and then purchase the identical stock again to avoid taxes, a technique known as a wash sale. The Internal Revenue Service (IRS) forbids an investor from performing a wash sale while engaging in tax selling.

To be more exact, a wash sale occurs when an investor sells an asset via a broker in order to make a loss, but then repurchases the same asset, or a virtually similar asset, from another broker within 30 days after the sale. If the IRS considers a sell and purchase securities transaction to be a “wash,” the investor will be denied any tax advantages.

Tax Selling vs. Wash Sale

Tax selling enables an investor to keep their stake despite suffering a capital loss. In fact, wash sales are prohibited, although tax sales are permitted. Tax selling often includes investments with large losses, which implies that these sales frequently concentrate on a limited number of assets traded on public exchanges. The price of the securities decreases when a significant number of sellers execute a sell order at the same time.

After the selling season, shares that have gotten significantly oversold have a chance to recover. Furthermore, since tax selling often happens in November and December as investors attempt to realize capital losses for the approaching income tax season, the most appealing assets for tax selling may be those that are most likely to yield big profits early in the following year.

A suitable investment plan would thus be to purchase during the tax selling period and sell once the tax loss has been confirmed. If investors want to repurchase shares that were sold at a loss, they may do so when the 30-day wash sale restriction is lifted. Furthermore, shares sold at a loss must have been in the investor’s possession for at least 30 days.

  Tax-Equivalent Yield

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