Broker Check
Tax-Loss Harvesting

Tax-Loss Harvesting

November 18, 2022
Share |

Turning Lost Money Into A Tax Winner


Tax-loss harvesting may be able to help you reduce taxes now and in the future.

Tax-loss harvesting allows you to sell investments that are down, replace them with reasonably similar investments, and then offset realized investment gains with those losses. The end result is that less of your money goes to taxes and more may stay invested and working for you.

Capital Gains and Losses

Capital gains result when an individual sells an investment for an amount greater than their purchase price. Capital gains are categorized as short-term gains or as long-term gains.

Keep in mind that the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Long-Term vs. Short-Term Gains

Short-term capital gains are a gain realized on an asset held one year or less and they are taxed at ordinary income tax rates. Long-term capital gains are a gain realized on an asset held longer than one year and are taxed according to different ranges (shown below).1


Long-Term Capital Gains Tax Brackets (for 2022) 

 

It should also be noted that taxpayers whose adjusted gross income is in excess of $200,000 (single filers or heads of household) or $250,000 (joint filers) may be subject to an additional 3.8% tax as a net investment income tax.1

Also, keep in mind that the long-term capital gains rate for collectibles and precious metals remains at a maximum 28%.2


How tax-loss harvesting can help minimize taxes 

An investment loss can be used for 2 different things: 

  • The losses can be used to offset investment gains
  • The losses can offset $3,000 of income on a joint tax return in one year

Unused losses can be carried forward indefinitely.

Rules for Capital Losses

Capital losses may be used to offset capital gains. If the losses exceed the gains, up to $3,000 of those losses may be used to offset the taxes on other kinds of income. Should you have more than $3,000 in such capital losses, you may be able to carry the losses forward. You can continue to carry forward these losses until such time that future realized gains exhaust them. Under current law, the ability to carry these losses forward is lost only on death.3

For some assets, the calculation of a capital gain or loss may not be as simple and straightforward as it sounds. As with any matter dealing with taxes, individuals are encouraged to seek the counsel of a tax professional before making any tax-related decisions.

Tax-loss harvesting is just one tool in service of your broader investment strategy can be employed throughout the year, not just during the month of December as many would assume. Investment fundamentals, such as remaining diversified and staying the course over the long term, are more important overall than short-term tax considerations.

 


1. Investopedia.com, July 19, 2022
2. Investopedia.com, May 4, 2022
3. Investopedia.com, March 22, 2022