Tax loss harvesting is strategically selling an investment at a loss, or “realizing” a loss on the sale of a capital asset in an effort to reduce the tax liability on any capital gains realized in the same calendar year. There are some restrictions, but ultimately it means you can reduce how much tax you pay on gains made from the sale of capital assets.
Example
If you bought shares in a corporation for $10,000 and you sell them for $60,000 over one year later, you have a realized long-term capital gain of $50,000 and you will incur capital gains tax on that profit. If in that same calendar year you realize $20,000 in capital losses, you can offset your $50,000 gain with those losses. This would leave you with $30,000 taxable capital gains (instead of $50,000). This is tax loss harvesting.
Tax loss harvesting is an important year-end tax planning strategy, particularly if you are invested in equities or other capital assets and have realized long-term capital gains. So, where can and can you not use this tactic?
Avoiding the Pitfalls of Tax-Loss Harvesting
You can utilize tax-loss harvesting to offset up to $3,000 of ordinary income (or $1500 if you are married and file separately) per tax year. Any remaining amount above this limitation can be carried over into subsequent tax years and offset any future taxable income. You can carry forward these losses indefinitely.
Example
You realized a capital loss of $12,000 in the calendar year 2022. If you had no capital gains, you will be allowed a maximum loss of $3,000 for 2022, with the remaining $9,000 ($12,000 less the $3,000 capital loss limitation utilized in 2022) carried forward to future tax years until exhausted.
If you are using capital losses to offset any capital gains, the amount you can apply against these gains is limited to your total gains plus an additional $3,000, allowing you the opportunity to offset all taxable gains, and an additional $3,000 to offset ordinary income.
The wash loss rule
Also known as the wash sale rule, this is a pitfall when it comes to securities such as stocks or bonds.This regulation prevents you from realizing a loss when you repurchase the same security (or one that is nearly identical to it) within 30 days before or after the sale. This regulation prevents people from gaining the benefit of a realized loss but also keeping the same (or nearly identical) portfolio. To illustrate,here is what would happen on your tax return.
Example
You bought a share of stock for $200 and it has dropped to $100 per share. You sell it for $100 and then the following week, you repurchase this stock at $110 because you really liked this particular stock and you think it will go back up in value. When you disposed of this share at $100, you realized a $100 loss, but since you repurchased the same stock the following week, the loss is disallowed.. Instead, this $100 loss is added to the basis of the share purchased for $110; meaning you now own the share for $210. Thus, you have not realized a loss for tax purposes.
Do wash-losses apply to crypto currency and digital assets
Crypto currency and digital assets are considered property under this tax code; they are not considered “securities”, like stocks and equities . This means, like with property, if you bought one bitcoin at $55,000 and you sell it at a loss for $15,000, you can buy the same bitcoin the same day for the new lower value and still $ realize a loss of $40,000 to offset any realized gains you made that year. You are allowed a large capital loss but your portfolio remains in the same position as prior to the loss, you are still holding 1 bitcoin. .
When should I harvest my losses?
This strategy is normally applied in the latter stages of the calendar year. By this point you will know approximately how much capital gain you have realized and the opportunities that exist to offset these capital gains. . This strategy works best when you have realized considerable gains and you are holding some losers that you are looking to offload.
What next?
At Walker Glantz, we specialize in tax planning and minimization and applying the tax regulations to help our clients reduce their tax burdens.. If you would like to learn more about tax loss harvesting and see if it applies to you, reach out to our tax department here. It could be the best thing you do this year.
Realized: Sold assets (like stock or equities, in this instance). Selling one share in a corporation for $100 when you bought it for $10, is a realized gain of $90. This is a taxable transaction
Unrealized: Unsold assets. If you bought a share of stock for $10 and it is worth $100,, you have an unrealized gain of $90, since this stock has not yet been disposed of. This gain is a “paper” gain.