(IntegrityPress.org) – Capital markets experience ups and downs, particularly for more volatile investments like stocks. Yet, a year of price declines could possibly yield one advantage if you play your cards right: year-end tax losses, also known as tax-loss harvesting. Here are the three most important things to know about this practice.
Money managers often clean up their portfolio holdings before the end of the tax year. Approximately 50% of U.S. mutual funds have a fiscal year-end between Oct & Dec. They tend to sell stocks with large losses to avoid reporting them in their year-end report. pic.twitter.com/o5T5ZepdEz
— Dr_Silberschmelzer (@silberschmelzer) December 29, 2021
- Tax losses can offset gains: You must report any investment profit you make as taxable income. However, the government looks at your overall investments, meaning a profit on one sale will offset the loss on another. So, choosing to “lose” on one investment by selling it at a certain time might help you to keep more profit from another security.
- Losses can offset other income: Just investment income can benefit from this tax rule. If your capital losses exceed the gains, you can offset up to $3,000 of those funds against your other income. Also, if you’ve fallen more than $3,000 in the red, you can carry the loss forward to the next tax year.
- You must adhere to the wash sale rule: If you intend to buy back a losing investment (or one effectively identical to it) after selling the asset for tax purposes, you must wait more than 30 days to do so, or no tax benefit will accrue. The IRS calls this the wash sale rule.
Happy investing!
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