Harvesting Investment Losses to Offset Gains
September 13, 2022
What comes to mind when you think about autumn? You may enjoy apple picking with your grandchildren, taking a fall foliage tour, or sipping a pumpkin-spiced latte on your deck.
Fall is the harvest season, but it is also an opportune time for tax-loss harvesting to save on investment gains potentially, now and in the future.
What is tax-loss harvesting?
Tax loss harvesting is strategically selling investments with losses to offset investment gains to reduce your overall capital gains tax bill. It is understood that profits made through the sale of an investment are subject to taxes. However, not everyone is aware that if you lose money on a sale, you can take a capital loss and offset similar gains realized in the same or even subsequent periods to lower your tax bill.
How does tax-loss harvesting work? [1]
Let’s say you sell an investment after owning it for more than one year and realize a gain, for example:
| Cost basis (purchase price) | $25,000 |
| Investment sold at | $40,000 |
| Capital gain | $15,000 |
Taxes due (@15% long-term capital gains rate) $2,250
You sell another investment and realize a loss, for example:
| Cost basis (purchase price) | $50,000 |
| Investment sold at | $35,000 |
| Capital loss | $15,000 |
Capital gain – Capital loss $0
Taxes due $0
This scenario assumes assets are held for more than one year and taxable income is greater than $80,800 but less than or equal to $501,600 for a married couple filing jointly. [2]
In this example, the loss on the sale fully offsets the gain, eliminating the capital gains tax. But it is important to note that investors can use up to $3,000 of net losses against current year ordinary income. This loss can be used against higher ordinary income rates making it even more powerful.
Ask your advisor to discuss how net capital losses exceeding $3,000 may be carried forward to future tax years until exhausted. [3]
What is the wash-sale rule?
By law, you have to wait more than 30 days after the sale of a security before replacing it with a substantially similar type of investment (or have done it more than 30 days prior to the sale). [4]
What Do You Need to Do?
Your Washington Trust Wealth Advisor regularly reviews your investment portfolio and looks for tax-loss harvesting opportunities. Please reach out to your advisor if you have any questions about your investment strategy.
Not yet working with a Washington Trust Wealth Advisor? Please contact us to learn more!
[1] Effective Jan. 1, 2013, individual taxpayers are liable for a 3.8 percent Net Investment Income Tax on the lesser of their net investment income, or the amount by which their modified adjusted gross income exceeds the statutory threshold amount based on their filing status. Source: www.irs.gov/individuals/net-investment-income-tax
[2] Topic 409, Capital Gains and Losses, IRS
[3] www.irs.gov/individuals/net-investment-income-tax
[4] Wash-Sale Rule: What Is It, Examples, and Penalties (investopedia.com)
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This material is presented for informational purposes, and nothing herein constitutes legal, accounting, or tax advice. Please consult with an attorney or tax professional regarding your specific financial, legal or tax situation.
The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.