In the US, losses incurred from selling stocks from losing investments can be used to lower capital gains from winning trades.Short-term capital gains are taxed as though they are ordinary income which is taxed based on a progressive tax table. Near the end of the year, if you already have realized some gains (that you’ll have to pay taxes on) and are still holding on to some losing positions, you may decide to cut your losses and sell your losing stock positions. This will allow you to harvest losses to offset some of your gains, thereby reducing taxes that you’ll have to pay. If you don’t have any gains to offset, you can also reduce your ordinary income (wages, etc.) by up to $3,000 of your losses. In a way, this may encourage you to stop holding to that losing stock and cut your losses, and also reduce your tax bill. On the other hand, the stock might recover and you’ll miss out on it. You’re not allowed to buy the stock again within 30 days of selling it, and still be able to harvest the loss, because of wash sale rules.
The taxation of capital gains in the Philippine Stock Exchange is a bit different. Capital gains on stocks traded in the Philippine stock market are not assessed a specific capital gains tax rate. Capital gains are also not treated like ordinary income. Instead, every time you sell stocks, there is a so-called stock transaction tax of 0.6% that is levied on the gross selling amount (exclusive of commissions). This tax is automatically withheld by the broker. With this kind of tax, the higher your capital gains are (as conventionally defined), the absolute amount of the stock transaction tax becomes a lower percentage of your profits. For example, if you sell your shares when its price has increased by 10%, the stock transaction tax would just be about 7% of your net profits. At 20% stock price increase, the “effective capital gains tax rate” is just about 3.7%. Considering that the lowest marginal rate for ordinary income after the first PHP 250,000 is 20%, these “effective capital gains rates” are pretty low, that is if you’re making profits.
Note that the stock transaction tax rate was only recently raised to 0.6% from 0.5% in 2018 because of a new tax law. There is a new proposed tax law that aims to eventually reduce this rate to 0.1% after a few years.
But what does this tell us about tax-loss harvesting? Since the stock transaction is levied on the gross selling amount, the actual net capital gains or losses are not accounted for. You pay the stock transaction tax even when you are getting rid of a losing stock position. Capital losses cannot be used to offset capital gains to reduce the tax burden. In short, the concept of tax-loss harvesting is not applicable in the Philippine stock market.