Stocks have been on a roller coaster ride this year, leaving some people wondering if there is a way to make lemonade out of lemons. If you have non-retirement stocks/assets, you may be able to save on taxes by doing tax-loss harvesting before year-end.
Tax-loss harvesting works by selling both the asset that has a gain and an asset(s) that has a commensurate loss to offset or eliminate any gain. This can potentially have large positive impacts on your taxes.
For example, you might be holding onto a stock because it has large gains, and you can’t sell it without a large tax implication. This can either be in your portfolio or your company stock (as long as it isn’t restricted like RSU’s or Stock Options). If you have another stock/asset that is down, now can be a good time to sell both assets in order to reduce or limit your taxes.
Some things to keep in mind
• Tax-loss harvesting only works for non-retirement accounts/assets. It doesn’t work for 401(k)s, IRAs, or Roths.
• In normal years, you must pay taxes on interest, dividends, and realized capital gains in your non-retirement accounts. Tax-loss harvesting only applies to realized gains/losses or assets that were sold during that year.
• If you sell a stock or mutual fund at a loss, you cannot buy the same stock/mutual fund back for at least 30 days. If you buy back before 30 days, you trigger wash sale rules that annul the loss. Consider purchasing a stock/fund that is similar but not “identical,” or wait until the 31st day to buy it back..
• You first offset short-term gains with short-term losses and long-term gains with long-term losses. (Short-term means held less than a year, Long-term means held longer than a year). Net losses of either type can then be deducted against the other kind.
You can use up to $3000 of net capital loss to offset ordinary income. There are times when it is advantageous to realize short-term losses vs. long-term losses and vice versa.
• This works with all assets, not just stocks. For example, it works with real estate, where you can sell one property at a gain and offset it by selling another property at a loss.
Tax-loss harvesting is a great way to potentially reduce your tax bill. If you wonder if you can benefit, contact one of our Private Wealth Managers for a tax planning session or contact a qualified CPA for tax advice.
*SFS does not offer tax advice or prepare tax returns.
