2022 Year-End Tax Planning: Tax Loss Harvesting

This year, many investors have at least a few stocks in their taxable brokerage accounts that are underwater.  This is not a pleasant situation to be in, but it does present a tax-planning opportunity.  If your loss investments are ones that you would be comfortable selling, you can reduce your tax bill by selling those investments. 

Selling stocks at a loss gives rise to a capital loss.  Accumulated capital losses are first offset against any accumulated capital gains and capital gain dividends you have in the current year.  You can deduct up to $3,000 of remaining losses against ordinary income.  If you have losses remaining after that, you don’t lose them: you get to carry them forward indefinitely for use in future years. 

Many times, investors wish to recognize the loss but don’t want to part with the investment forever, so they repurchase the stock shortly after they sell it.  You can do this, BUT you must wait 30 days to reacquire the stock, or else you can’t deduct the loss.  This includes buying the stock in a family member’s account or in a retirement account.  The same rule applies if you buy the stock 30 days before you sell it as well. This is called the wash sale rule. 

If you don’t want to wait to reinvest your proceeds, one way around the wash sale rule is to purchase a similar stock.  For instance, if you sold Coke, you could buy Pepsi.  However, be careful, because if the stocks are too similar – for instance selling a Vanguard 500 Index fund and buying a Fidelity 500 Index Fund – you will have a wash sale. 

If this opportunity interests you, your DWD accountant can help you and/or your financial advisor avoid the wash sale rules.