Inflation is sky-high, interest rates are on the rise, and we’re funding another country’s full-scale war that is thousands of miles away. 2022 was a terrible year for the stock market. If you’re an equity investor, chances are your net worth has dropped substantially from only one year ago. That’s a bummer, but there may be a silver lining!
Tax break for realizing a loss
When you sell investments at a loss (i.e., when you “realize” a loss), you can receive a tax break. The government feels bad about bad investments. However, the tax break is (generally) only a $3,000 offset to ordinary income, so the government doesn’t feel that bad about it. $3,000 is better than nothing.
Tax losses offsets future tax gains
The $3,000 isn’t an enormous benefit. However, depending on your portfolio, taking a tax loss, especially with such a sharp decline in our current markets, can make a significant impact on your tax returns down the road. Any amount over $3,000 can be carried forward into future years. This means you can claim the $3,000 loss each year, if applicable. This isn’t a “use it or lose it” benefit. Moreover, once your portfolio does have an upturn in the future, you can offset that income with current tax losses. Tax rates are on the rise going into 2023, so keep this in mind.
Be mindful about a few applicable tax rules
If you plan on selling a security for tax harvesting purposes, you can’t immediately buy the same (or substantially similar) security for at least 30 days without surrendering the tax advantage in the current tax year. Long-term losses (one year or longer) are generally matched with long-term gains and vice versa. Be careful on the timeline of your investments. Finally, tax harvesting generally doesn’t work for retirement accounts, such as an IRA or a 401(k). A further explanation into these rules is beyond the scope of this article. Nonetheless, these rules should be carefully reviewed before making a decision.
Obligatory Disclaimer: Nothing contained in this post constitutes legal advice. Nothin herein should be construed as or relied upon as legal advice. Everyone’s situation is different. Consult an experienced attorney, financial advisor, or tax expert before making any decisions.
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