Is there really a silver lining to losses in your investments? You may be able to improve your tax situation by realizing losses. This can help for the 2022 tax year, and in future years too.
A capital loss happens if you buy an investment and then sell it for a lessor value. For example, if you spent $10,000 to buy Microsoft and you sold it this year for $8,000, you would have a loss of $2,000. As the market has been mostly negative since November 2021, many investments have shown losses. It is not always wise to wait for a turnaround because sometimes there isn’t one forthcoming, and there can be tax benefits to jumping ship.
You can “realize” tax losses when investments have declined by selling them. Tax losses can be used against capital gains now and in the future. Tax losses can be used to reduce your taxable income, even if you have no gains. And tax losses can be carried forward indefinitely. Here is an example of how tax losses work:
Tax loss realized in 2022 = ($100,000)
No gains in 2022 = option to write off $3,000 to reduce your taxable income, reducing your tax bill.
Net Tax Loss to carryforward = $100,0000 – $3,000 = ($97,000)
Tax gains realized in 2023 = $50,000
Use tax loss of ($97,000) against gain to show no gain in 2023, you don’t pay any capital gains taxes on this gain. Taxes would be between $5,000 – $10,000 depending on your tax rates. You can still write off $3,000 to reduce your income too. This leaves you a net loss to carry forward = $97,000 – $50,000 – $3,000 = ($44,000)
This can continue into future years until the loss is used completely. So, in negative markets we will often recommend clients “realize” losses to save you taxes in the future on gains and income. You also reinvest into new securities so that if the market improves you get the benefit of the new investment going up, as well as a tax loss to use. There are wash sale rules to consider, so you can’t invest in the same security for at least 31 days, but it is an option to think about. This example is based on current rules in place, the loss carries forward may change in the future.
You have until December 30th this year to realize losses, so if you are going to use this strategy you should review your portfolio soon. If you would like to discuss this with someone on our team, please schedule time with Taeya. You can use this link to set up a time that works for you.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. This is a hypothetical example and is not representative of any specific investment. Your results may vary. Investing involves risk including loss of principal. Pacific Coast Financial Services, Inc. and LPL Financial do not provide tax advice or services. Please consult your tax advisor regarding your specific situation.