Tax-loss harvesting involves identifying investments that have lost money on paper (unrealized loss), then selling them to officially book the loss (realized loss). These capital losses can help offset any potential capital gains from other investments. To remain invested in the market, you may buy a new investment to replace what you sold–or even repurchase the original investment.
There are restrictions around how you replace an investment sold for a loss. The IRS wash sale rule prevents you from buying back a security, or a substantially similar security, within 30 days of selling it at a loss. To properly harvest capital losses (and offset capital gains), you must have a deep understanding of your total portfolio and tax code, as well as the proper documentation.
A financial advisor may identify opportunities for tax-loss harvest for clients. A tax preparer helps with this side of things, reviewing statements from financial institutions alongside your tax return.
Tax losses can be useful no matter when you realize them, since you don’t need to use them immediately. They can be carried forward into future years to offset capital gains; this is known as a tax-loss carryforward.
One example is if there was a large market downturn, you could realize losses and bank them to offset capital gains in future years, when you may realize a large profit.
A smaller, but still useful, benefit of a capital loss is that it can be used to offset up to $3,000 of ordinary income (in 2023), if your losses exceed your gains.
At Quorum, we call out this type of tax opportunity with clients, then work with their tax advisor team to review and implement an overall tax strategy. This approach lets clients approve the overall tax plan but spares them the hassle of tax code and dealing with the IRS. If you have questions about tax planning at Quorum, or your own overall tax plan, contact us.
Read more:
Tax location: Why the where matters
Investment accounts: Do you have a tax strategy?
Tax prep versus tax planning
