With the recent volatility in the stock markets, you may have heard buzzwords thrown around such as capital gains and tax-loss harvesting. Let's explore what these terms mean and how to add them to your investment strategy.
You realize capital gains when you sell securities, like stocks, for a higher value than what you paid for them. You may also realize capital losses if you sold securities for a lower value than what you paid for them. When you have capital losses, you can use them to offset any capital gains you have which will result in what is known as tax-loss harvesting. While tax-loss harvesting doesn't eliminate your losses, it can be an advantage to your overall tax and investment strategy.
Sell Now, Buy Later
You may sell a security now at one price point and buy it back later at a different price point, however, watch out for the IRS’s "wash-sale" rule. You can't claim a loss on a security if you buy the same or a "substantially identical" security within 30 days before or after the sale; this means the window can be up to 61 days long. To summarize, you can't just sell a security to rack up a capital loss and then quickly replace it.
Other Strategy Considerations
The maximum yearly amount you may deduct for capital losses is $3,000 in excess of capital gains for your federal tax return. Any remaining capital losses above that can be carried forward to potentially offset capital gains in following years.
Another consideration is that you may not wish to sell assets in a portfolio for tax-loss harvesting, especially if your financial plan has been built for the long term. Also, you can only practice tax-loss harvesting in taxable accounts, not in retirement accounts.
While some investors begin thinking about tax-loss harvesting toward the end of the year, it’s a good practice to consider throughout the year. As you strategize for capital gains, make sure to consult your tax or accounting professionals before implementing any tax strategy that may involve tax-loss harvesting.
Information in this material is for general information only and not intended as investment, tax or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.
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