Harvesting tax losses transforms losses into gains. Here’s when to ignore it

When the stock market dips, a strategy known as tax-loss harvesting can be a silver lining. But that doesn’t make sense for every wallet, say financial experts.

Here’s how tax loss harvesting works: you can sell declining assets from your brokerage account and use the losses to offset other profits. Once the losses exceed the gains, you can subtract up to $3,000 per year from your regular income.

The harvest of tax losses may now be more enticing with the S&P 500 index down nearly 14% from January’s all-time high. However, there are scenarios where it is better to avoid this strategy.

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A popular move is to sell a losing asset and replace it with something similar to gain tax relief while maintaining the original portfolio exposure.

However, this so-called wash sale rule prohibits that loss if you buy a “substantially identical” investment within the 30-day window before or after the sale, according to the IRS.

It may be best to consider skipping tax loss harvesting if you can’t find a “good equivalent replacement,” said certified financial planner Matthew Boersen, managing partner of Straight Path Wealth Management in Jenison, Michigan.

While it may be easier to find exchange-traded funds or alternative mutual funds, selling individual stocks requires you to “sit on the sidelines for the next 30 days,” he said. declared.

“The market can move a lot during this time,” said Kristin McKenna, Boston-based CFP and managing director of Darrow Wealth Management. You can potentially “negate the tax advantages of harvesting losses” by picking another stock, she said.

“It’s important to consider the role of funds in an asset allocation and the impact of selling different securities on risk,” McKenna added.

Zero percent capital gains

Also, if your earnings fall below certain thresholds, it’s better to take profits on assets held for more than a year, called long-term capital gains, rather than losses, explained Larry Luxenberg. , CFP and founder of Lexington Avenue Capital Management. in New City, New York.

If you have taxable income below $41,675 for single filers and $83,350 for married couples filing together in 2022, you are in the 0% bracket for long-term capital gains.

You calculate taxable income by subtracting the higher of the standard or itemized deductions from your adjusted gross income, which is your income minus the so-called “over the line” deductions.

“You might actually want to take gains if you’re still in the zero capital gains rate,” Luxenberg said.

When you’re in the 0% bracket, you can sell profitable assets, avoid paying long-term capital gains taxes, and buy back the same investments for a so-called “tiered basis”, which adjusts the purchase price at current value. , guaranteeing lower taxes in the future, he said.

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