Tax Loss Harvesting
It’s no secret that the stock market is up this year for the 3rd year in a row. Every year we examine portfolios in non-retirement brokerage accounts that may have the benefit of tax loss harvesting.
Tax loss harvesting is a strategy allowed by the IRS, where investors can sell a security at a loss to offset capital gains now and potentially in the future. There are, however, a few rules to know regarding this strategy. If you plan on selling an investment for a tax loss, you should know that the IRS wash sale rule prohibits you from buying or selling a substantially identical investment to the one you just sold within 30 days (before or after) the sale. Realized losses may be used to offset up to $3,000 of taxable income in a tax year, in addition to offsetting realized capital gains. The amount of unused losses may be carried forward into future years and used to offset future gains and income until fully exhausted.
For example:
If an investor has $100,000 in realized gains this year and has $10,000 in realized capital losses this year, the investor can offset $10,000 of those capital gains with losses to minimize the tax impact. In years that the losses exceed the gains, the investor can use $3,000 of the losses to offset their ordinary income, thus reducing their taxable income by $3,000. The remaining realized losses are carried forward into future years until depleted. It’s worth mentioning that tax loss harvesting does not apply to IRA’s or retirement accounts, as they are not taxed on capital gains. We’ve been working on tax loss harvesting for clients where and when possible and where it has made the most sense.
Disclosures:
The Pitti Group Wealth Management, LLC (“The Pitti Group”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where The Pitti Group and its representatives are properly licensed or exempt from licensure.
This case study is provided for illustrative purposes only to provide an example of the firm’s process and methodology. The results portrayed in this case study are not representative of all client situations or experiences.
The Pitti Group and its advisors do not provide accounting or tax advice. Consult your tax professional.
Long-term capital loss can be adjusted only against long-term capital gains. Short-term capital loss can be adjusted against long-term capital gains as well as short-term capital gains.