Toward the end of the year, some institutions and traders sell stocks with unrealized losses. Realizing losses on these positions allows you to reduce your taxable profits for the year. Assume, for instance, a trader has realized profit of $50,000 thus far, and has a position with unrealized profit of $15,000 in late December. By closing that position, realized profit drops to $35,000, reducing tax obligations for the year. This move is sometimes preferable to holding the unrealized losses into the next year and paying more in taxes.
A trader may also choose to realize a loss through tax-loss selling even with a net loss on realized trades due to loss carryover.
*This definition is not tax advice. Consult with your accounting or tax attorney for more information.
