| Lemonade from Lemons With the recent losses in the equity market as well as other investments such as crypto, now may be a good time to realize tax losses. Below is a brief Q&A on tax loss harvesting. Please work with your financial advisor to look holistically at your portfolio. Please don’t let the “tax tail” wag the dog here. However, there could be opportunity to realize tax losses without impacting your portfolio allocation and strategy. |
| What is Tax Loss Harvesting? Tax loss harvesting is when you sell an investment that has an unrealized loss to generate the tax benefits. Typically, this is often done by then reinvesting in a similar but not identical investment. This is why its important to consult your financial advisor to ensure your portfolio allocation and strategy is not negatively impacted by the sale of your investments with losses. What is a Wash Sale? A wash sale tax rule prevents you from selling a security to realize the tax loss and then purchasing that same (or substantially identical) security within 30 days after the sale. How to avoid Wash Sale Restrictions? You can purchase another security that has a similar economic profile and even one that is very correlated with the security sold. An example would be selling the S&P 500 and buying the S&P 1,000 with the proceeds. The two indexes are similar but not substantially identical. See also digital currency below. Does this apply to Crypto and Virtual Currency? Yes, Crypto is one of the best investments to use for tax loss harvesting. Crypto investments such as Bitcoin are not considered “securities” for tax purposes. As a result, they are not subject to the wash sale rules. So, you can sell and then buy back your Crypto and still obtain the tax benefits. Make sure you are tracking the basis and gain/losses on your Crypto sales. Can I Offset My Losses with Other Gains? Yes, your capital losses and capital gains are netted on your tax return. Is There a Limit to the Loss Deduction? After you net the capital losses and capital gains, the net capital loss deduction is limited to $3,000 per year. Please keep in mind that if you exceed that amount, you carry it forward to next year and could then be used to offset gains in 2023. What If an Investment Was Bought at Different Times? Your investments may have many different cost basis based on when you purchased it. You may have purchased into a security during the pandemic lows but also bought recently. Your cost basis is tracked by each individual purchase. You can select the sale of specific lots to maximum the tax loss harvesting. The identification of which lot is sold needs to be determined prior to executing a trade. This also means you may need to look deeply into your unrealized gains and losses to determine if there are tax losses to be harvested. Can I use tax loss harvesting in my retirement account? No. Capital gains and losses in your retirement accounts are not reported on your tax return. |