Intro

Given the current state of the market and the wild swings between negative and positive I thought I'd write a short post on how this can benefit folks.

Capital Loss

When you sell stocks that have lost money since you purchased them you incur what's called a Capital Loss. Now this is where a lot of people stop and stay out of the market, but this is the wrong idea.

Tax Loss Harvesting

Tax Loss Harvesting is the act of actively harvesting the Capital Losses so that you can claim the loss and off-set your gains and reduce your taxable income.

Once you've sold stock because of the drop you should immediately purchase similarly performing stock so that as the market recovers you aren't missing out on the recovery gains.

Benefits

You can use losses to off-set any number of Capital Gains. If you have any losses leftover after off-setting your Capital Gains you can claim up to $3,000 to reduce your taxable income and any remaining loss after that can be carried over to future years.

Managing

This can be quite a nightmare to manage manually, so many people don't bother doing it. Personally I wouldn't bother doing it myself most of the time either, luckily this is where Robo-Advisors come in.

There's a horde of automated financial advisers popping up as of late (Betterment, Wealthfront, SoFi Invest, etc) and always more on the way, many of these platforms offer Tax Loss Harvesting for free and will automate all the work out of performing and managing it.

Betterment for example recently sold some positions in VTI and purchased ITOT for me, harvesting some loss and I'll see the fruit from that in 2021 when I claim the losses on my taxes.

Ending/tl;dr

Market turmoil sucks but there are ways to profit off it, and as long as you don't panic it's far from the end of the world.