With the general stock market year-to-date being down, you may want to explore capital loss harvesting as a tax strategy to minimize your overall income tax liability.
How Does Tax Loss Harvesting Work?
When the stock market dips, tax loss harvesting can be a silver lining. You can sell declining assets from your brokerage account to generate capital losses (either short term of long term). You then use these capital losses to offset any capital gains to the full extent of capital losses. Additionally, if you have capital losses remaining, after fully offsetting capital gains for the year, you can offset up to $3,000 of the capital losses against ordinary income.
There are future tax benefits for any unused capital losses from current year. Any unused capital losses is carried forward to future years, and these offsetting rules outlined on the first paragraph are repeated until the capital loss is completely depleted.
Capital Losses Generated from “Wash Sales” Is Excluded
Watch out for wash sales. If you buy the “same or substantially identical” investment within the 30-day window before or after the sale, any capital losses are disallowed. So the strategy is to sell and buy investments that are not same or substantially identical to the investment sold, or buy outside the 30-day window of the sale. Talk with your financial advisor about what strategies they suggest to avoid wash sales.
Capital Loss Harvesting and Retirement Accounts
Tax-loss harvesting strategy only applies to taxable investment accounts. Retirement accounts such as IRAs and 401(k) accounts grow tax-deferred and do not generate capital gains or losses.
Discuss capital loss harvesting with your financial advisor to make sure it is consistent with your overall portfolio strategy. Our firm does not provide financial advising and are exclusively focused on tax preparation and planning, to avoid unintended biases.
Feel welcome to reach out with any questions at Zak.S@CapitalTax.com or 925-977-7784.