Many investors are extremely unhappy with the market trend right now as it is highly likely their stocks are declining significantly. While seeing this, many may be extremely disgruntled, however, there is a way to turn this negative, into a positive.
More Details
Selling a stock at a big loss may seem like it has an extremely small upside, however, it may be able to lower your taxes! Investors who do choose to take a loss on a taxable account can utilize said loss to offset capital gains taxes owed from selling appreciated stocks. Tax-loss harvesting usually gets spoken about around year-end, however, the recent push into a bear market has carried the conversation forward.
An investor who harvests a loss can not only use it to offset capital gains but also up to $3,000 of ordinary income. After that, any remaining loss will be carried forward to offset capital gains or $3,000 of ordinary income in a future year.
Convinced? Beware of the Wash Rule!
Something that complicates this tax-loss harvesting strategy is when the investor wants to maintain their exposure to the same industry of the stock sold. This scenario is when you need to be careful to not break the IRS’ wash-sale rule.
The wash-sale rule states that if an investor deducts a loss on a stock, they are not allowed to buy a “substantially identical” stock or security for 30 days up to the date of sale, and 30 days after. If you happen to break this rule, the deduction may be disallowed.
Nitty Gritty:
The wash-sale rule can be pretty straightforward when referring to a stock, for example, if you sell Apple for a loss, you cannot turn around and buy Apple immediately afterward. Similarly, if you sold Apple, and then purchased a call option on it (which allows you to buy a stock at a certain price in the future), it would be disallowed by the IRS.
A good workaround for this can be utilizing index funds related to the stock you sold. If you chose to sell Apple, but still want to be an investor in the company, you can buy a mutual fund or ETF which tracks a technology index owning Apple.
Additionally, cryptocurrency is not subject to the wash rule as it is considered property rather than a security. So those owning cryptocurrency may want to realize a loss, and then take the deduction on their taxes, then purchase it right back!
Wrap Up
While there may not seem like many upsides to the current market trend, there are many advantages available for be utilized to taxpayers’ benefit. While making and saving your money may become more complex as the market trends downward, there are still a lot of strategies to be played by taxpayers.