Tax selling is a sort of transaction in which an investor sells a capital loss-containing asset in order to reduce or even completely erase the capital gain achieved by other assets for the purpose of calculating their income tax liability. The investor can avoid paying capital gains tax on recently sold or appreciating assets via tax selling.
Selling stocks at a loss is known as tax selling, and it is done to lower the capital gain on an investment. Due to the fact that capital losses are tax deductible, they can be used to balance capital gains and lower an investor’s overall tax burden.
Assume, for illustration, that an investor sold ABC stock for a gain of $15,000 in capital. Since they are in the highest tax rate, they must pay the government $3,000 in capital gains tax, or 20% of their income.
But suppose they lose $7,000 on the sale of the XYZ stock. They will only be required to pay $1,600 in capital gains tax since their net capital gain for tax purposes will be calculated as follows: $15,000 – $7,000 = $8,000.
Observe how the gain on ABC is reduced by the realized loss on XYZ, which lowers the investor’s tax burden.
