Market turmoil? Maybe consider 'Tax Loss Harvesting'

Although the recent stock market plunge has made investors cringe when opening their 401k, IRA, or Individual Brokerage Accounts, some of that red can be turned into green come next tax season. There is much more to being a successful investor than picking the right stocks or funds, you must be able to optimize your tax bill and take advantage of any tactics the government doesn't exactly advertise. 'Loss Harvesting' is a tactic used to save on any capital gains loss liability and even a limited amount of normal income.

Although this strategy is generally recommended towards the end of the year to realize your losses quicker, the S&P 500 and Nasdaq 100 being down nearly 15% and 25%, respectively, from all time highs presents an opportunity to cut back on the year's tax liability. Maybe you were lucky enough to sell a little stock at the beginning of the year before the war in Ukraine and surging inflation. Maybe you received a large commission check this past month that you will owe back-taxes on via a 1099. You can realize/sell any losses currently in your portfolio and net the entire amount against any capital gains you have. If you don't have any capital gains, you can realize up to $3,000 in losses against your ordinary income too. Since ordinary income is in your regular income tax bracket and much higher than the 15-20% you are probably paying for capital gains, this represents a decent tax break that you may need next tax season. Please note that after you sell an investment for a loss, you must wait 31 days before you can buy back into that investment. This is called the 'Wash-Sale Rule'. If you do buy it back within 31 days, you will not be able to deduct that amount.

Perspective Personal Finance is keen on sticking to your long-term investment strategy, but if you happened to make a poorly timed investment, you may be able to take a little skin out of the game and save on your tax bill. Those tax savings can be used for various cash needs next April, or it can be reinvested to continue your long-term strategy.

Disclaimer: We do not offer professional financial advice, only commentary on what we have seen in the market and where we think the market can head.

Note: All investments have the potential to lose significant value, please use caution when seeking investment opportunities.

15 views0 comments