Using an investment loss to lower your capital-gains tax
Every year, taxpayers ask the same question: Is there a way to keep more of what I earn?
The answer may be sitting right inside your investment portfolio.
Investments rarely move in the same direction. While some may gain significant value, others may decline. And while seeing an investment lose value isn’t usually good news, a loss can sometimes create a valuable tax opportunity.
That’s why it can be worth looking beyond your portfolio’s overall performance and taking a closer look at individual investments.
If you haven’t reviewed your portfolio recently, now may be a good time. A simple review can reveal investments that have declined in value and those losses may be useful when it comes to offsetting capital gains.
This is where a strategy called tax-loss harvesting comes in.
It may sound complicated, but the basic idea is fairly simple: you can sometimes use investment losses to help reduce the tax impact of investment gains.
In plain terms: When some investments have gained value while others have lost value, you may be able to sell investments with losses to intentionally “realize” those losses. Those capital losses can offset capital gains, potentially reducing the amount of gain subject to tax. If your capital losses exceed your capital gains, you can generally deduct up to $3,000 of the excess against other income ($1,500 if married filing separately), with additional losses carried forward to future years. Special rules, including the wash-sale rule, can limit how losses are used, which disallows the loss if you buy back the same or a nearly identical investment within 30 days
A simple example: Say you sold one stock for a $5,000 gain, and another stock is currently down $5,000. By selling both, the loss cancels out the gain and instead of owing tax on that $5,000 profit, you owe nothing.
Knowing How to Use this Strategy
Tax strategies like this exist for everyday investors, not just the ultra-wealthy. But knowing a strategy exists and knowing how and when to apply it to your specific situation are two very different things.
How tax loss harvesting interacts with your overall tax picture, your other investments, and your long-term goals — all of it matters. Get it right, and you keep more of your money working for you.
At Hemingway & Buchanan CPA in Austin, Texas, we believe there are many ways you can reduce your tax burden and save money.
Our team is ready to sit down with you, look at what’s really happening in your accounts, and help you understand which strategies, like tax loss harvesting, could genuinely make a difference for you this year.
Have questions about your tax planning and preparation, or where to even start? Reach out to Hemingway & Buchanan CPA today. We’re here to help, to answer your questions, and to guide you toward making taxes less taxing.