Stock markets have been truly awful this year — but here’s one way that can actually help your tax return

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Here’s some consolation for anyone who hit the stock market this year: The boom in your portfolio could provide some gains in the next tax season.

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It’s a strategy called “tax-loss harvesting,” and as a year-end tax planning approach, financial experts say this strange-sounding strategy isn’t just reserved for the wealthy.

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“Anyone who is a taxpayer and who has dollar investments has an opportunity to potentially take advantage of this, especially in a volatile market,” says Joanna Gruda, a national accounting and advisory firm at Markum Family Wealth. said a tax partner in the service group.

The phrase “tax-loss harvesting” may sound daunting to some, said Frank Newman, portfolio manager at Ally Invest, the brokerage arm of Ally Financial ALLY.

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,‘Anyone who is a taxpayer and has dollar investments has an opportunity to potentially take advantage of this, especially in a volatile market.’,

– Jonah Gruda, Tax Partner at Family Wealth Services Group in Markum

But people should not be intimidated by the tax strategy of collecting capital losses to offset gains and reduce taxable income, he said. “This is a great strategy for everyone, regardless of account size,” Newman said.

Selling at a loss in this market seems quite easy. Even with a strong October, the Dow Jones Industrial Average (DJIA),
Down about 12% year to date. s&p 500 spx,
More than 19% off and Nasdaq Composite Comp,
Over 29% off.

To use the benefits of tax-loss harvesting, investors need to choose investments to make up for the losses and choose when to take those losses (and return to the same position very soon because of tax rules). should not come). It sounds like an attempt at timing the market — a practice many investment experts say people should avoid when working to achieve their long-term goals.

There is a tax aspect and investment aspect to the strategy, Gruda said. “A lot of times, those two goals don’t align seamlessly.”

That said, people shouldn’t let the “tax tail” wag the dog when it comes to investing (and the same goes for making big purchases based on tax incentives, such as electric vehicles and energy-efficient home improvements. ).

But the market may prompt many to contemplate the idea of ​​getting something good out of at least a capital loss. Here’s a look at some of the finer points of the topic:

learn the basics

Start with the tax rules on capital assets. This includes stocks, bonds, a portion of exchange traded funds, a portion of the cryptocurrency BTCUSD,
even more.

Sell ​​at profit and capital gain apply to the difference between the initial basis cost and the sale to the owner. For many people, the tax rate on a long-term capital gain will be 15%, meaning the owner held it for at least a year before settling it.

15% rate this year Applies to individuals earning between $41,676 and $459,750, and for married couples filing jointly, it is $83,351 to $517,200.

Short-term capital gains are bought and sold within a year, so the IRS treats the income as ordinary income that is combined with other income. After this, whichever tax bracket the person falls in, he is taxed on it.

Sell ​​at loss and capital loss apply to the difference between the acquisition price and the selling price. Loss offset gains and then additional losses of up to $3,000 can be deducted against income. The remaining loss is carried forward to future years.

According to Fidelity Investments, short-term losses are applied against short-term gains first, and long-term losses offset long-term gains first. Fidelity said that once one type of gain is completely exhausted, the remaining loss amount can be applied against another type of gain.

For this reason, it is important to see that short-term losses can offset short-term gains, which will be subject to a higher tax rate.

There’s another starting point, Gruda said. By how much will the potential tax profit for this year exceed the investment profit of holding the investment and leaving the strategy?

There is no blanket answer, he said. In some cases it can be a very low payout. In others, it can be a great move. If a taxpayer bets that they will be coming in at a large capital gain during 2023, or further, the carry forward can be a useful tool for deploying losses.

Still, Uncle Sam is finally getting a cut of the profits from the appreciation of the property. Tax loss harvesting “reduces and defers the tax bill. It doesn’t eliminate the tax liability down the road,” Gruda said.

Do not get wet with wash cell

Even if a person sells their brokerage account or IRA at a loss, they may not want to exit the portfolio position permanently. They want to get back into the investment now at an affordable cost with room to grow again.

According to the IRS, just wait a moment”wash sale” rules.

The IRS will not calculate a capital loss if the taxpayer is also buying or receiving a “substantially similar” investment within 30 days from the sale or within 30 days. The rule applies to investments such as stocks, bonds, mutual funds, exchange-traded funds and options – but not cryptocurrencies.

The basic trick is just keeping track of the days, Gruda said. He’s seen his share of people who missed out on tax benefits “because they didn’t see the clock.”

Another skill is considering what counts as “quite similar” to a fast-moving investor who sees a buying opportunity 30 days before or after the day of the sale.

Gruda said an investor can sell stocks and buy exchange-traded funds or mutual funds that contain stocks and do not follow the rules. On the other hand, holding stocks from mutual funds or ETFs, even direct stock purchases will not trigger the rule, he added.

Let’s say an investor has multiple investment accounts – perhaps one is a long-term account and another is more for short-term trading. The rule applies to all accounts, Newman noted. So if one sells and the other buys within 30 days or so, the wash-sell rule would eliminate the capital loss, Newman said.

Newman said buying and selling shares of two different funds tracking the same index within a 30-day period could also apply to the wash sale rule. However, according to a tutorial by Charles Schwab SCHW, a move like selling a piece of an ETF tracking the S&P 500 and then soon buying an ETF tracking the Russell 1000 Index would be a good idea.
“This will protect your tax breaks and keep you in the market with the same asset allocation,” said a lecturer.

But when one is eyeing buybacks and closing the wash-sell window in one place, they may have a chance to start the tax strategy process in a different part of their portfolio. “There are really tax loss harvesting opportunities this year across many different asset classes,” Newman said.

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