I’m aware of tax-loss harvesting — selling losing investments at year’s end to offset capital gains — but I failed to pull the trigger in December because I didn’t understand the idea well enough to implement a strategy.
Planning ahead for next year, I asked ChatGPT to outline the concept of tax-loss harvesting, but to dumb it down as if a 12-year-old were asking, and it delivered this “no suits, no spreadsheets” overview.
The Lemonade Stand Example
ChatGPT used an analogy that’s familiar to many young, ambitious and entrepreneurial tweens by asking me to imagine I ran two lemonade stands, with varying levels of success.
Stand No. 1: Oops
- You spent $10 to set it up.
- You sold it later for $6.
- You lost $4.
Stand No. 2: Nice
- You spent $10 to set it up.
- You sold it later for $14.
- You made $4.
The bot explained, “The IRS looks at Stand No. 2 and says: ‘You made $4. Pay taxes on that.'”
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And Now, for the Smart Move
ChatGPT then unveiled the core concept — instead of paying taxes on the money the winning stand earned, the “smart move” would be to say, “Hey IRS, I lost $4 on Stand No. 1,” to which the IRS replies, “OK… $4 gain minus $4 loss = $0 profit.”
It wrapped up the example with this summation: “Using your losses to cancel out your gains so you pay less tax. That’s tax-loss harvesting.”
So, How Does That Apply To Stocks?
Next, ChatGPT translated how the concept works in the adult world with three simple points:
- You sell a stock for less than you paid — that’s a loss
- You sell a stock for more than you paid — that’s a gain
- Losses can cancel out gains
And what if you have any left over?
The bot wrote, “You can use up to $3,000 per year to reduce regular income. Anything left over rolls forward to future years.”
It also reminded me of “one big (very important) rule” — no cheating.
“If you sell a stock at a loss, you must wait 30 days before buying it back (this is called the wash sale rule). Otherwise, the IRS says ‘Nice try. That loss doesn’t count.'”
When Life Hands You Lemons…
ChatGPT concluded by explaining “why grownups love” to turn losses into wins through tax-loss harvesting.
- Pay less tax
- Keep more money invested
- Especially useful in bad markets
- A favorite trick of wealthy investors (but totally legal)
In closing, the bot asked whether I would like it to explain the concept to me as if I were five instead of 12. No thanks, ChatGPT. In my very human experience, the best conversation with a five-year-old about capital gains taxes is always the one you don’t have.
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This article originally appeared on GOBankingRates.com: I Asked ChatGPT To Explain Tax-Loss Harvesting Like I’m 12 — Here’s What It Said
