NEW YORK (TheStreet) -- All of a sudden its December -- time to harvest those tax losses.
If that observation has you scratching your head, heres a quick primer.
Federal capital gains taxes are charged for profits made in taxable accounts, which include most investments that are not in tax-deferred accounts such as traditional IRAs and 401(k)s.
Tax bills are triggered when you sell an investment at a profit. If you bought a share of stock for $100 and sold it for $200, the $100 in profit would be taxed in the year the stock was sold. If the stock had been owned for longer than one year, the maximum long-term capital gains tax rate is 15% (or 20% for people with large incomes). If the stock had been held for a year or less, the gain would be taxed at the short-term rate, which is the same is your income tax rate, anywhere up to 39.6%.
Of course, most investors at one time or another have investment losses as well. So when you do your tax return the losses are subtracted from the gains to come up with a net gain or loss. Losses, then, can reduce or eliminate your taxes on gains. And if losses exceed gains, they can be used to reduce your taxable income by up to $3,000 a year, or they can be carried forward to be applied against capital gains or income in future years.
Thats why investors are urged to hunt around for money-losing investments to sell before the tax year ends Dec. 31.