Reconciling Your Losses in a Tough Market Through Tax-Loss Harvesting

It has been a tumultuous year for the investing community, with interest rate hikes, rumors of a looming recession on the horizon, and a seemingly continuous rising inflation that has left the U.S. and global market reeling. From the outside looking in, it might appear that investors don’t have much this year that can generate excitement. However, the downturn in your investments is not a complete loss. Some investors turn to a little-known strategy called “tax-loss harvesting.”

What is tax-loss harvesting?

The name tax-loss harvesting conveys a perception of complexity. However, it is not as ominous as it sounds. The IRS allows you to offset your gains with your losses in a taxable account. Individuals can ultimately offset $3,000 of investment losses against their taxable income, or if the investor has no capital gains to offset in the year the capital loss was “harvested,” they can carry the loss forward to a future tax return. There is no expiration date for this strategy. [i]

How does tax-loss harvesting work?

Tax-loss harvesting works by looking at the losing positions and determining if there is anything you can close for the amount of the gain that would be taxable. Typically if you have a profit and want to close one of the positions at a gain, you would add the amount to your income if held less than a year or generally pay 15 to 20 percent if held for more than a year. [ii]

Can I use any investment instrument?

One thing to keep in mind is that tax-loss harvesting only works on taxable investments. Certain retirement accounts, for example, a 401(k) or IRAs, are tax-deferred and therefore do not allow you to offset taxable gains. [iii]

Is there anything else I should be aware of when considering tax-loss harvesting?

Something else to be aware of is a “wash sale.” You cannot benefit from tax-loss harvesting if you sell an investment and repurchase it, having bought the investment 30 days before or 30 days after you sold it. So essentially, before you sell an investment for tax-loss harvesting purposes, ensure you did not purchase the same security in the last 30 days and refrain from rebuying it for 30 days after the sale. [iv]

How do you benefit from tax-loss harvesting?

You may be wondering at this point how you can actually benefit from tax-loss harvesting. The idea is that you can potentially lower your tax bill and earn a return on the money you would have paid in taxes. This technique has the potential to be complicated even for professionals working with investments, so it is highly recommended that you seek the guidance of a financial professional with tax-loss harvesting experience before attempting this strategy.

What is the first step that should be taken when considering employing the tax-loss harvesting strategy?

Consider consulting a financial professional to see if tax-loss harvesting could work for you. Tax-loss harvesting is not for everybody, but it can be beneficial for individuals where it is feasible.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by LPL Marketing Solutions