Turn Losses into Wins: A Guide to Capital Gains and Loss Harvesting

It is now a great time to think about how you can minimize your tax bill. If you’ve sold investments like stocks or real estate, you might have capital gains—profits earned from selling an asset for more than what you paid. Capital gains are taxed differently depending on how long you’ve held the investment. Assets held for less than a year are considered short-term and are taxed at your regular income tax rate, while assets held longer than a year qualify as long-term capital gains and are taxed at preferential rates of 0%, 15%, or 20%, depending on your income.

What Is Loss Harvesting, and How Can It Help You?

Loss harvesting is a strategy that allows you to offset capital gains by selling investments that have decreased in value. For example, if you sell an investment with a $10,000 gain but also sell one with a $7,000 loss, you’ll only owe taxes on the $3,000 net gain. If your losses exceed your gains, you can use up to $3,000 ($1,500 if married filing separately) to reduce other taxable income, with any remaining losses carried forward to future tax years. However, be cautious of the IRS’s wash sale rule, which disallows losses if you repurchase the same or a substantially identical investment within 30 days before or after the sale.

Year-end tax planning offers a unique opportunity to review your investment portfolio and consider strategies for reducing your tax liability. By strategically timing the sale of profitable and underperforming investments, you can not only lower your tax bill but also rebalance your portfolio in line with your financial goals. This can be particularly beneficial if you’ve had significant gains earlier in the year or if market volatility has impacted your investments.

Pitfalls to Avoid

While loss harvesting can be highly effective, there are pitfalls to watch out for. Transaction fees can erode potential savings, and state taxes may have different rules that impact your overall strategy. Additionally, accidental violations of the wash sale rule can result in losing the ability to claim your losses. If you’re considering any moves, it’s essential to avoid rash decisions and ensure your choices align with your broader financial objectives.

Selling investments and implementing a tax-saving strategy should always be done in consultation with your financial advisor. They can help you weigh the potential tax benefits against the impact on your overall portfolio and long-term financial plan. Whether you’re focusing on reducing taxes or rebalancing for future growth, professional guidance ensures you make informed, strategic decisions. If you need help with your taxes contact us at info@mkhstaxgroup.com.