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Bonacorsi Wealth Management

Tax Loss Harvesting

What is Tax-Loss Harvesting?

Tax loss harvesting is the action of selling a security at a loss to offset the capital gains from a sell that resulted in a profit resulting in tax savings.

 Short term capital gains and losses come from the sale of investments you have held for one year or less. Gains from the sale of these short-term investments are taxed at your marginal rate on ordinary income. Depending on your income and filing status, this rate could be as high as 40.8% combined with the net investment income tax (aka Medicare Surtax) for couples with earnings above $600,000 and individuals earning more than $500,000.

Gains from the sale of investments held long-term (more than one year) are taxed at a much lower rate. Depending on income and filing status long-term capital gains rates range from 0% to 20% (23% including NIIT).

Losses must first be used to offset the same type of gains-short term gains/short term loss, long/term gains/long term loss, if losses are more than gains you can use the excess against the other type of gain.

Losses can also be used to offset up to $3000 in income, this can be helpful if you didn’t have gains or have unused losses after offsetting losses.

Still have gains? If after taking advantage of using your losses against current year capital gains and income you still have an unused loss you can carry the loss over to a future year and use when needed.

One thing to be careful of is the “wash-rule sale”. This rule disallows the tax write-off if you sell a position for a loss and rebuy a “substantially identical” position to replace it within 30 days before or after creating a 60-day window of time.

Here a couple of examples to help understand these rules:

Let’s assume I had two transactions in my brokerage account last year - I sold stock I had previously bought in 2016.

On January 3, 2016 I bought 200 shares of ABC stock for $50 per share for a total price of $10,000 and sold them on June 5, 2018 for $25 per share ($5,000) for a $5000 long term loss.

Also, on January 3, 2016 I bought 200 shares of DEF stock @$50 per share ($10,000) and sold them on July 10, 2018 for $55 per share ($11,000) for a $1000 long term gain.

As long as I don’t use the proceeds from the loss sale to buy a substantially identical security, within 60 days (30 days prior or after the loss sale) I can use the $5000 loss in ABC to offset the $1000 capital gain in DEF and $3000 in income. The unused $1000 loss remaining can be carried forward and used in a future year.

 Determining when to harvest losses, how to reinvest the proceeds from the sale while maintaining the allocation you desire, and how the strategy might improve your overall tax and investment strategy should be discussed with your financial and tax advisor.

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