How to Lower Your Tax Bill Use Your Losing Stock Positions

lower your tax bill

In this Blog Post, I’m going to show you how to use your losing stock positions to lower your tax bill.

Hi, If you’re like most people, you probably have some stocks that are worth a lot less than what you paid for them. Well, in this Blog Post I’m going to show you how to use those losses to pay less taxes on your income. So whether you’re a beginner or an expert, this article is for you.

Taking losses to offset capital gains can prove to be a smart strategy come tax time. 

Selling an investment at a significant loss has few, if any, benefits, but there is one: It might reduce your taxes.

Investors who experience a loss in a taxable account may use it to reduce capital gains taxes owing from the sale of stocks that have appreciated. Tax-loss harvesting is typically discussed at year’s end, when individuals consider how to balance realized profits with anticipated losses. The S&P 500’s plunge into a bear market, however, has accelerated the conversation.

“It’s a great idea to use tax-loss harvesting if you have capital gains that need to be offset, such as from a stock you’ve held for years, and you have losses from the previous six to 12 months that need to be offset.” “It would be an excellent use of tax-loss harvesting if you have capital gains

The recent market downturn has made it more appealing. Wealthfront, a robo-adviser that offers automated tax-loss harvesting, said the volatility prompted its program to gain more losses in the first half of June than it did throughout July through December altogether.

An investor can use a loss to negate capital gains, as well as $3,000 of ordinary income, if he or she suffers one. Any remaining amount may be used to offset $3,000 in ordinary income in the following year.

Worse, the interest income is taxed once again (at a maximum rate of around 30%). Betterment, Wealthfront, and Schwab Intelligent Portfolio and Personal Capital all have automated tax-loss harvesting for those with larger balances.

According to the findings of Backend Benchmarking, which examines robo-advisers, programs can differ significantly throughout advisers. “While some advisors realized net losses of over 8% of account value on the year, others did not realize any losses at all,” according to the 2021 Tax-Loss Harvesting Study.

Schwab Intelligent Portfolios was identified as the most likely to result in a negative return for the year. “For the year, Schwab Intelligent Portfolios stood out for having the greatest percentage of realized net losses,” according to the research.

Wash-Sale Rule

lower your tax bill

When an investor detects a loss, but also wishes to preserve exposure to the stock they sold, the difficulty begins. This is where you must be cautious not to violate the IRS’s “wash-sale rule.”

The wash-sale rule prohibits you from purchasing a “substantially identical” stock or security for 30 days before and 30 days after the sale date. If you do, the deduction may be disallowed.

It’s easy to figure out what’s “substantially identical” with stocks. If you deduct a loss for Netflix, you can’t go out and buy Netflix immediately afterward. “Where it gets complicated is if you sold a stock, then bought a call option on it,” which gives the right to buy a stock at a certain price in the future, said Tim Steffen, director of tax planning at wealth manager Baird Private Wealth Management. “From the IRS standpoint, that’s substantially identical.”

When an active mutual fund or exchange-traded fund is sold, it’s often due to a change in the manager.

“If you invest in a growth fund and then trade it for another one, we’re quite comfortable with that if they’re actively managed because their fees, holdings, and other factors will be different.”

A passive fund can help you sleep well at night. You won’t have to worry about runs on the bank or your money being lost in a market correction since these are only possible when active investments are concerned. But you won’t be able to use a Vanguard S&P 500 index fund to purchase a Fidelity S&P.

In addition, index funds can assist with tax-loss harvesting in a different way. If you’re selling stock to realize a loss, such as Meta Platforms Inc., but want to maintain industry exposure, you might opt for a mutual fund or ETF that tracks a technology index that includes Meta.

Lower your tax bill

If you don’t use an adviser, human or otherwise, here are a few tax points to keep in mind: Wash-sale regulations prevent a husband from selling stock and immediately purchasing it back for his wife. You can’t sell a security in your brokerage account for a loss and then purchase it in an IRA either.

What is the one market sector that isn’t subject to wash-sale regulations? Cryptocurrency. According to tax laws, crypto is considered property rather than a security. So individuals can deduct their losses and then buy them back, according to Steffen. “You could have the government reimburse part of your Bitcoin loss,” he added. If you enjoyed this article, we also have a video on this.

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