The stock markets have been really terrible this year – but here’s a way that can help on your next tax return


Here’s some solace to anyone who’s been attacked in the stock market this year: A battering your portfolio can provide some advantage in the upcoming tax season.

It’s a strategy called “tax loss harvesting,” and as tax planning approaches the end of the year, financial experts say this backward strategy shouldn’t be limited to just the rich.

“Anyone who is a taxpayer with investment money has a potential opportunity to capitalize on that, particularly in a volatile market,” said Jonah Gruda, tax partner at Family Wealth Services Group at Marcum, a national accounting and advisory firm.

Frank Newman, portfolio manager at Ally Invest, the brokerage arm of Ally Financial ALLY, said the phrase “tax loss harvest” might sound daunting to some people,
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“Anyone who pays taxes and has investment money has a potential opportunity to profit from that, especially in a volatile market.”


– Juna Gruda, tax partner at Marcums Family Wealth Services Group

But he said people should not be intimidated by the tax tactic of collecting capital losses to offset gains and reduce taxable income. “It’s a great strategy for everyone, regardless of account size,” Newman said.

Selling at a loss seems easy enough in this market. even with strong octoberDow Jones Industrial Average DJIA,
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It’s down almost 12% to date. S&P 500 SPX Index,
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More than 19% discount and Nasdaq Composite,
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It is of more than 29%.

To harness the benefits of tax loss harvesting, investors need to choose investments for losses and need to choose when to incur those losses (and also not to return early to the same situation due to tax rules). This looks very much like an attempt to time the market – practice Many investment experts say that people should avoid it When working to achieve their long-term goals.

There is a tax side and an investment side to the strategy, Groda said. “A lot of the time, those two goals don’t align smoothly.”

People have been told not to allowtax tail“You shake the dog when it comes to investments (and the same goes for large purchases based on tax incentives, Like electric cars and energy-efficient home improvements).

But the market may cause many to at least consider the idea of ​​getting some good out of capital losses. Here is a look at some of the topic’s finer points:

Learn the basics

Start with the tax bases on capital assets. Includes stocks, bonds, a share of an exchange-traded fund, and a slice of Cryptocurrency
BTCUSD,
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and more.

Selling at a profit The capital gain applies to the difference between the owner’s initial base cost and the sale. For many people, the tax rate will be 15% on long-term capital gains, which means the owner held them for at least a year before getting rid of them.

rate 15% this year It applies to singles earning between $41,676 and $459,750, and for married couples applying together, the amount ranges from $83,351 to $517,200.

Short-term capital gains are bought and sold within a year, so the IRS views the proceeds as ordinary income combined with other earnings. It is then taxed in whatever tax bracket the person lands in.

Selling at a loss The capital loss applies to the difference between the purchase price and the selling price. Losses offset gains and then excess losses of up to $3,000 can be deducted against income. The remaining losses are carried forward to future years.

Short-term losses are applied first against short-term gains, and long-term losses first offset long-term gains, according to Fidelity Investments. Fidelity said that after one type of gain is completely nullified, the remaining amount of loss can be applied against the other type of gain.

For this reason, it is important to start by seeing where the short-term losses can offset the short-term gains, which will be subject to a higher tax rate.

There is another starting point, said Groda. How much will this year’s potential tax benefits outweigh the investment benefit of holding the investment and abandoning the strategy?

He said there is no comprehensive answer. In some cases the payoff may be very small. In other cases, it might be a great move. If the taxpayer bets that it will generate significant capital gains through 2023, or beyond, carryover losses can be a useful tool to spread them out.

However, Uncle Sam eventually gets a cut in profits from rising asset values. Harvesting the tax loss “lightens and defers the tax bill. It does not eliminate the tax liability in the future,” Groda said.

Don’t soak sell laundry

Even if someone sells at a loss from their brokerage account or IRA, they may still not want to exit the portfolio position permanently. They may want to return to investing now at a cheaper cost and with room for regrowth.

Just wait a minute, according to the IRS.”wash-sale” Base.

The IRS will not calculate a capital loss if, within 30 days before the sale or within 30 days afterwards, the taxpayer purchases or acquires a “substantially identical” investment. The rule applies to investments such as stocks, bonds, mutual funds, exchange-traded funds, and options – But not cryptocurrency.

The main trick, Groda said, is just to keep track of the days. He’s seen his share of people losing tax benefits “because they didn’t watch the clock.”

Another skill is looking at what is considered “largely identical” to a fast-moving investor who sees a buying opportunity either 30 days before or after the day of the sale.

Groda said an investor can sell a stock and buy an ETF or mutual fund that contains the stock and does not go against the rule. He noted that going the other way, from a mutual fund or ETF containing stock to outright buying the stock, would also not activate the rule.

Suppose an investor has several investment accounts – perhaps one is a long-term account and the other is more for short-term trades. Neumann noted that the rule applies across accounts. So, if one sells and buys the other within 30 days before or after, the washed sale rule will eliminate the capital loss, Neumann said.

Newman said buying and selling shares of two different funds that track the same index over a 30-day period may also trigger a wash-sell rule. However, a move like selling a piece of an ETF that tracks the S&P 500 index, and then buying an ETF that soon tracks the Russell 1000 index would be fine according to a tutorial from Charles Schwab SCHW,
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“This would preserve your tax cut and keep you in the market with the same asset allocation,” He explained.

But while someone is looking to buy back and let the laundry window close in one place, they may have the opportunity to start the tax strategy process in a different part of their investment portfolio. “There are already opportunities to take tax losses across a number of different asset classes this year,” Neumann said.