Investors typically aim to avoid losses, as the primary goal of investing is to increase your wealth through capital appreciation or income generation. While taxes on gains are unavoidable, they remain preferable to incurring losses.
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No investor is flawless; even seasoned money managers face losses on occasion, as it’s part of the investing journey. The silver lining is that you can leverage your inevitable losses to your advantage come tax time. Here’s how:
If you have taxable capital gains, you might offset a portion or the entirety of those gains by reporting capital losses. This strategy is often called tax-loss harvesting.
For instance, if you sell Nvidia stock and realize a $15,000 profit in July, but discover a $15,000 loss in your Apple holdings by December, you can sell your Apple shares, effectively nullifying your Nvidia gain and resulting in no tax obligation.
Be mindful, however, of the “wash-sale” rule. According to the IRS, “A wash sale is when you sell securities at a loss and then acquire the same (or substantially identical) securities within 30 days of the sale.” This means that if you sell Apple at a loss to counterbalance your Nvidia gain, you cannot buy Apple back within the preceding or following 30 days.
It’s crucial to remember that you should not sell a stock purely for tax benefits. For instance, if you’re a long-term believer in Apple, don’t offload it just to offset your gains because you won’t be able to repurchase for 30 days. During that interval, Apple’s stock could rebound, negating any potential tax benefits. Only implement tax-loss harvesting on shares you’d genuinely consider selling for investment reasons.
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If your acknowledged capital losses surpass your capital gains, the excess losses can be used to offset up to $3,000 of ordinary income.
Consider a scenario where you have $10,000 in capital gains, $13,000 in capital losses, and a salary of $70,000. By offsetting your gains with losses, you end up with $3,000 in excess losses. This amount can lower your taxable income from $70,000 to $67,000, leading to potential tax savings or an increased refund size.
