Graham Stephan Is Selling His Stocks. Here's Why

It's a move you might want to make, too.

As a general rule, it's a good idea to buy quality stocks and hold them in your brokerage account for many years. But sometimes, selling stocks when they lose value can work to your benefit.

In fact, real estate and financial guru Graham Stephan recently tweeted about a strategy known as tax-loss harvesting. Stephan explained that he's selling stocks to take advantage of this strategy, and you may want to do the same.

How tax-loss harvesting works

Tax-loss harvesting is a strategy where you sell stocks that have lost money to offset gains on the stocks that made you money. Let's say you sold a stock in your brokerage account earlier this year and made $5,000 in profit on it. That profit isn't yours to keep in full. Rather, you'll owe the IRS a portion of that profit.

The amount of tax you owe on capital gains will depend on a few factors. These include whether you held the investment for at least a year and a day before selling it, and, if that wasn't the case, what tax bracket you fall into. But either way, if you profited in your brokerage account, the IRS will want a piece of it.

With tax-loss harvesting, you can sell a stock that's been underperforming at a loss and use that loss to cancel out your gains to some degree -- and possibly even in full. In fact, say you're able to take a $5,000 loss on a stock. If you're sitting on a $5,000 gain, your loss will offset it completely so you don't owe the IRS a thing on that particular gain.

You can also use tax-loss harvesting to offset some ordinary income -- up to $3,000 worth per year -- if you don't have any gains to offset in your brokerage account. And if you have an excess loss beyond that, you can carry it forward to a future tax year.

So, let's say you take a $5,000 loss in your brokerage account this month without having capital gains to offset. You can offset $3,000 of income for 2022 and then carry your remaining $2,000 loss into 2023. If you sell investments at a profit then, you can use your remaining loss to offset those gains.

Review your brokerage account now

If you want to use tax-loss harvesting to your advantage in 2022, the time to review your assets and sell stocks strategically is now. For that loss to count for 2022 tax purposes, it needs to be taken in 2022. That means you have a very limited window of time to unload stocks that haven't been doing well or no longer fit into your larger investment strategy.

Of course, a lot of people's portfolios are down right now due to the general state of the stock market. So rather than sell off a random stock that's down, try to focus on one that's unlikely to recover the value it's lost recently.

The best way to go about tax-loss harvesting is to sell stocks that have consistently done poorly. You don't want to go dumping stocks that are likely to gain a lot of value once the stock market settles down and recovers from its recent bout of turbulence.