How It Works
Let's assume that John sold two different stocks that he originally bought five years ago:
1. He sold 1,000 shares of Company XYZ at $25 a share. He originally bought them for $15 a share.
2. He sold 1,000 shares of Company ABC at $40 a share. He originally bought them for $20 a share.
These two transactions netted a $30,000 profit. If the long-term capital gains tax rate is 15%, John now owes $4,500 in taxes.
In order to reduce that hefty tax bill, John could take the opportunity to do some tax selling. The idea is that he could unload some of the dog stocks that he's been hanging on to and reduce the capital gains he pays taxes on.
For example, John still owns 200 shares of Company DEF, which he bought for $30 a share. Today, the shares sit at $15 a share, with little hope of recovery. If John sells those shares, he'll take a capital loss of $15 x 200 = $3,000.
This loss is tax-deductible. That means, he can use it to offset some of his gains and thereby reduce his taxes. Accordingly, instead of paying $4,500 in taxes, John would pay:
$30,000 gain - $3,000 loss = $27,000 net gain
$27,000 net gain x 15% = $4,050 taxes owed, net of tax selling
Tax selling saves him $450 in taxes.
