Capital losses! Ugh! You can sell your bad investments to save on your taxes. How?
The accountants call it “tax loss harvesting” but we will call it saving money on your taxes. When you buy an investment such as a stock, bond, or real estate in a taxable account and sell it for a price lower than the original price, you have what is known as a capital loss.
There are several ways to take advantage of capital losses and we will go over each scenario.
$3K Capital Loss Limit
The amount of capital losses that can reduce taxable income is limited to $3K per year. You are definitely thinking, “Joe, I lost a lot more money than a measly three grand this year!”
Don’t fret, here’s how you can use more than a three thousand dollar loss to your benefit.
Capital Loss Netting Out Scenario
For example, let’s say that you have Investment A that has lost $50,000 this year. However, you have nice gains of $47,000 with Investment B. If you choose to sell both Investments A and B this year, the gains and losses offset each other, for a grand total of $3,000 in losses. Guess what! You get all of the gains on Investment B for free! Those gains are exempt from income tax, so the loss in Investment A isn’t that bad after all.
This is a great way to reduce a large position in your employer’s stock in a tax efficient manner. These gains and losses are reported on Form 8949. Talk to your financial advisor and accountant with any questions regarding this form.
Loss Carry Forward Scenario
If you happen to have only Investment A in your portfolio, you can still use the $50,000 loss. In this scenario, there is no Investment B that can be used to balance your losses, but you can use $3,000 of losses this year to reduce your taxable income. You won’t use up all of the losses in tax year 2022, and you can roll the remaining $47,000 of losses to future years to offset gains and reduce taxable income.
Summary
Make the best of your situation and turn your losses into lower tax payments. Remember this has to be done by December 31st, so don’t wait until it’s too late. If you have any questions, please feel free to set up a free consultation.