Effective strategies for managing the ups and downs of investments, assets

Craig Neumann, CPA

Tax-loss harvesting
In this year of incredible volatility in the investment markets, many of our clients are asking how they may use these wild market swings to reduce their current tax liability. An effective strategy is known as tax-loss harvesting.

Tax-loss harvesting can result in recognizing zero net capital gains and in turn, zero tax on the sale of investments within the sale calendar year. The key concept is to purposefully match investment losses to offset investment gains. This can provide significant tax savings or allow you to reset your basis in an investment that you would like to hold long term by re-purchasing a stock that has decreased in price. Beware of the wash-sale rules discussed below.

Before we go further, we need to define a few terms:

  • Basis — The amount paid for an investment (may be subject to depreciation.)
  • Capital gain (Loss) — The sales price minus the purchase price of an investment.
  • Short-term capital gain — Net gain on an investment that was held one year or less.
  • Long-term capital gain — Gain on investment held more than one year (minimum of 366 days).
  • Ordinary tax rates — Tax rates on most income ranging from 10% to 37% tax brackets.
  • Long-term capital gains tax rate — Tax rate on gain from investments held more than one year. Rates range from 0% to 15% to 20% depending on the amount of gain and gross income.
  • Net investment income tax (NIIT) — Additional 3.8% tax on investment income for high earners (more than $250,000 for married filing jointly.)

Capital gains or losses can come from the sale of stocks, bonds, mutual funds, ETFs, cryptocurrency, real estate, collectibles or any item that has monetary value. Frequently, we have clients who have sold investment or rental real estate at the top of the market and are now looking for ways to reduce their taxes. The best way to do this is to identify investments in their portfolio that have suffered losses in the current year and to then sell those investments to realize and recognize a capital loss. It is beneficial, but not required to use long-term losses first to offset both long-term and short-term gains.

For the losses to be recognized, the investor must not buy the same or substantially identical stock within 30 days before or after the sale that generates the loss. This is known as the wash-sale rule. The rule is meant to prevent an investor from generating an investment loss to create a tax benefit while effectively maintaining the same position in the stock.

Finally, to perfect this strategy, we encourage you to recognize an additional $3,000 of losses. After the losses and gains are netted to zero, an individual is allowed to take as much as $3,000 of capital losses to reduce your other ordinary W-2, retirement, self-employed or business income (when you have active participation in the business).

To learn more about this and other tax-advantaged strategies you can execute before the end of the year, join our CPAs on a Zoom seminar at 10 a.m., Nov. 22. This seminar will be hosted by Craig Neumann, CPA, and Chris Scoggin, CPA, of CS CPA Group. To get your complimentary invitation, email info@cscpagroup.com or at 520-568-3303.

As always, we are available for one-on-one meetings to provide specific, customized plans to best meet your needs.


This sponsored content was first published in the November edition of InMaricopa magazine.