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Tax harvesting is a strategy that investors can use to harvest capital gains for tax savings. When tax harvesting, you sell investments that have risen in value and buy replacement investments with the proceeds. When harvesting your capital gains, it's important to make sure that you identify your investment goals, stay diversified, and rebalance your portfolio regularly.

Tax Harvesting: a strategy that you can use to harvest capital gains for tax savings

If you're an investor and want to reduce your tax liability, Tax Harvesting is a strategy that can help. Tax Harvesting involves selling investments at the end of the year to realize capital gains and then using those gains to buy replacement investments at a lower cost basis. This will allow you to defer taxes on any realized capital gains until later in life when they may be taxed at lower rates than current ones.

In order for this strategy to work, however:

You must have enough money in taxable accounts (like stocks or mutual funds) where there are unrealized profits by December 31st of each year. Your brokerage firm must offer tax-deferred exchanges where they'll exchange one type of security for another without triggering any immediate tax consequences or requiring additional paperwork from you as long as both securities have comparable values according

Sell or Buy Investments

When tax harvesting, you sell investments that have risen in value and buy replacement investments with the proceeds. This could be stocks, mutual funds, or ETFs. The idea is to use your capital gains (the profit from selling an investment) to make additional purchases of other investments that are undervalued and therefore have more room for growth than your original ones did when they were purchased.

In addition to using this strategy at tax time, you can also choose to harvest your profits on a regular basis throughout the year by selling winners and reinvesting in new investments with those funds.

Identify Your Investment Goals

When harvesting your capital gains, it's important to make sure that you identify your investment goals, stay diversified, and rebalance your portfolio regularly. If you're using tax-loss harvesting, the goal is to minimize your capital gains. In this case, it's important to identify investments that have lost value in order to sell them off and realize losses on your taxes. If you're using the strategy as a way to diversify your portfolio and reinvest in other investments that have more room for growth than your original ones did when they were purchased, then it's important not to sell too many winners or else

When harvesting your capital gains, you will want to consider the following factors:

The cost basis of each security sold versus the sale price. This is important because the difference between a stock's original purchase price and its current value is known as "gain," which could be taxable if not offset by other losses or deductions. For example, if you bought 1 share of XYZ Company for Rs 830/- and it was worth Rs 8303/- when you sold it last year, then your gain would be Rs 7473/- (Rs 8303 - Rs 830/-).

However if instead, that same share was worth only Rs 415/- when sold today (and thus has lost 50% of its value), then technically there would be no taxable capital gains because there would be no actual profit earned from selling something that had already been losing value over time!

The cost basis of each security sold versus the sale price

When you sell a security, your capital gains tax is calculated based on the difference between your cost basis and sale price.

The cost basis of each security sold versus the sale price;

Your cost basis is simply how much you paid for an investment or asset at one point in time. For example, let's say you bought 100 shares of Apple stock five years ago for Rs 4151/- per share (Rs 415181/- total). Your original cost basis would be Rs 415181.00/- because that was what it cost to buy those 100 shares at that specific time. Now let's fast forward five years later: The stock has risen significantly since then and now trades at Rs 12455/-  per share (Rs 1245543.00/- total). So now we have two scenarios:

You decide to sell all 100 shares today (and thus realize any gains). In this case--assuming no other factors such as commissions apply--your profit would be simply calculated by subtracting what each individual share sold for (Rs 12455/-) from its original purchase price (Rs 4151/-), resulting in Rs 8303/- share X 100 = Rs 830362.00/-  profit! Easy peasy lemon squeezy!

The amount of capital gains eligible for tax purposes

Short-term capital gains are any profits you make on investments you've held for less than one year, and long-term capital gains are profits made on investments held for more than one year. There are a few exceptions to this rule, but for the most part, it's fairly straightforward. Capital gains tax rates The rate of tax on capital gains depends on your ordinary income tax bracket.

Tax-Loss Harvesting and Its Difference from Capital Gains Harvesting:

Tax-loss harvesting is a strategy utilized by investors to offset capital gains by intentionally selling investments at a loss. The primary goal is to reduce taxable income by using the losses incurred from certain investments to offset gains made elsewhere in the portfolio. This strategy effectively lowers the overall tax liability of the investor.

In contrast, capital gains harvesting involves intentionally selling investments that have appreciated in value. The purpose is to realize capital gains and then reinvest the proceeds in other assets. The objective of capital gains harvesting is to optimize tax efficiency by strategically managing the timing of realizing gains, potentially taking advantage of lower tax rates or minimizing gains subject to taxation.

Specific Examples of Investments Suitable for Tax Harvesting:

Examples of investments suitable for tax harvesting include individual stocks, mutual funds, and exchange-traded funds (ETFs). These investments often experience fluctuations in value over time, providing opportunities for tax optimization. 

For instance, an investor may identify stocks with significant unrealized losses and sell them to offset capital gains realized elsewhere in the portfolio. Similarly, investments with substantial gains may be sold strategically to lock in profits and optimize tax liabilities.

Different Approaches to Wash Sales Rules:

Wash sale rules are regulations imposed by tax authorities to prevent investors from claiming tax deductions on securities repurchased shortly after being sold at a loss. To navigate these rules effectively, investors can employ various approaches:

• Waiting Period: Investors may wait for a specified period before repurchasing a security that was sold at a loss to avoid triggering wash sale rules.
• Substitute Securities: Instead of repurchasing the same security, investors can consider investing in similar but not identical securities to maintain exposure to the market while complying with wash sale regulations.
• Tax-Loss Harvesting Rotation: Investors may strategically rotate investments to harvest losses while simultaneously maintaining exposure to the market. By selling securities with losses and reinvesting in alternative assets, investors can offset capital gains without triggering wash sale rules.

Use Infugro Financial Advisors' Tax Harvesting Calculator

Use Infugro Financial Advisors' Tax Harvesting Calculator to determine which assets can be best harvested for tax purposes.

How to use the calculator:

Click on Infugro Calculator and enter your information into our secure online form. You will then be able to see what kind of savings potential you have based on your current portfolio, along with how much income tax will be saved by harvesting these gains (and if there are any losses). The results will show you how much money could be saved over time at various levels of risk tolerance and investment time horizons, so it's easy to see which option works best for each investor's needs!

Conclusion

Tax harvesting is a strategy that investors can use to harvest capital gains for tax savings. When tax harvesting, you sell investments that have risen in value and buy replacement investments with the proceeds. 

When harvesting your capital gains, it's important to make sure that you identify your investment goals, stay diversified, and rebalance your portfolio regularly. Use Infugro Financial Advisors' Tax Harvesting Calculator to determine which assets can be best harvested for tax purposes

Frequently Asked Questions

When is the best time to tax harvest?

The timing of tax harvesting depends on various factors, including market conditions, investment goals, and individual tax circumstances. Generally, investors may consider tax harvesting towards the end of the tax year to assess their overall tax position and identify opportunities for optimization.

How much should I tax harvest?

The amount of tax harvesting depends on the individual's tax situation, investment objectives, and portfolio composition. Investors should consider consulting with financial advisors or tax professionals to determine the optimal amount to harvest based on their specific circumstances and goals.

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