If you sold capital assets in 2022 and generated taxable capital gains, it’s a great time to consider harvesting your capital losses to reduce or eliminate the capital gains tax. Below are a few strategies to consider.
Sell and Buy Back Stocks or Crypto
- For your long-term hold stocks or cryptos that have built-in losses, consider selling before year-end and buying back the same asset later. To avoid wash sales, wait at least 31 days to repurchase stocks. Wash sale rules do not apply to cryptos.
- If you are expecting lower Q3 & Q4 earnings reports, you may be able to repurchase the same asset at a lower price. This allows you to offset your capital gains, while maintaining your current positions.
- You may want to maximize tax-rate arbitrage by exchanging short-term capital gains for long-term capital gains (LTGC).
Sell and Buy Similar
- For stocks that have built-in losses, consider selling stocks before year-end and buying back similar stocks the same day. This allows you to offset your capital gains while maintaining your current portfolio balance.
- The stocks cannot be substantially identical, or the wash sale rules will disallow the loss. This includes puts and calls.
- However, you can purchase stock with a performance that is highly correlated with the stock you sold.
Sell and Buy Alternatives
- For assets that have built-in losses, consider selling before year-end and buying alternative assets. This allows you to offset your capital gains and rebalance or reposition your portfolio.
- For example, you may want to sell growth stocks with built-in losses and purchase value stocks or real estate. Or, you may have a taxable gain on the sale of your personal residence or business that can be offset with loss harvesting.
- This may be a great way to clean up legacy assets.
Sell and Deduct Losses
- If you don’t have gains to offset with losses, it may still be advisable to harvest losses. You can deduct up to $3,000 per year against ordinary income and carry unused amounts forward to offset future gains.
- This allows you to save up losses and better time future gains.
Points to Ponder
- Remember, the long-term capital gains tax rate starts at 0%. It most likely will not be beneficial to harvest losses in a year that you have qualified for a 0% LTCG tax rate.
- You may want to recognize built-in gains to maximize your 0% LTCG tax rate for the year.
- Loss harvesting is for taxable accounts only. It should not be used in retirement accounts.
- Wash sale rules apply to purchases by your spouse or the company you control.
- Consider the timing of dividend payments before selling.
- Always consult your financial team. Everyone’s situation is different. Benefits depend on the investor’s tax rate when they deduct the initial loss, as well as the rate at which they realize the later gain that the initial loss created.
Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.
Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.