Although there are a number of tax strategies to be considered at this time of year, one that we are discussing often with our clients currently is called “tax-loss harvesting.” Investopedia defines TLH as follows: “A strategy to lower current taxes paid to the U.S. federal government by deliberately selling an investment at a loss.”
It certainly never feels good to lose value in your investments, and we understand that no one begins investing with the intention of losing money! However, the inevitable ups and downs of the stock market will occur. The premise of TLH is to sell some of your investments at a loss to offset gains you may have realized from selling other investments that increased in value. The conclusion is that you would only pay taxes on your “net profit.”
For example, if you had $10,000 in gain from selling an investment, but you had another investment that was at a $3,000 loss, by selling this position you would have a “net profit” of $7,000 and thereby reducing your reported capital gains from $10,000 to $7,000.
Staying with the above scenario, if you did not have a capital gain but still wanted to maximize the tax benefits of a capital loss, you are also able to apply up to $3,000 of loss (per year) towards your ordinary income. But wait, there’s more! If you have capital losses that exceed your capital gains and the $3,000 of ordinary income, you can carry these losses forward into future tax years.
There are several other very important considerations, such as the “wash-sale rule” and the distinction between short-term and long-term capital gains/losses. We recommend speaking with your tax professional to learn more about the nuances of this strategy. If you have any questions, please feel free to reach out to us at any time!