By Karen Hube
Investment losses during these volatile times can be tax wins.
While many investors don't get around to tax-loss harvesting strategies until year-end, the recent 10% decline in the S&P 500 and subsequent market gyrations are a reminder that nabbing opportunities to improve after-tax returns "is a year-round sport, not just a year-end activity," says Mark Parthemer, Glenmede's chief wealth strategist.
If you wait until December to look for loss-harvesting opportunities, the market could be on an upswing and losses might be few and far between.
Tax rules allow investors to use realized losses to offset realized capital gains on a dollar-for-dollar basis in taxable accounts. So that tax loss on your Tesla shares this year can be used to offset capital gains anywhere in your holdings -- stocks, real estate, business sales.
There's more. Losses that exceed gains can offset up to $3,000 of ordinary income annually for most taxpayers, and unused losses can be rolled into future years indefinitely. If any of those Tesla losses you realize go unused this year, they can be carried forward to offset gains at any point -- for the rest of your life.
"A great thing about capital loss carryforwards is they're not subject to limitations by adjusted gross income or phase outs, and they don't expire," Parthemer says. "If you lock some in now, they can be used 10 years from now, so it's a great idea to collect them, even in small doses."
Long-term losses -- in shares you have held for more than a year -- must first be used to offset any long-term gains. Short-term losses, on investments held for 12 months or less, must first be paired with short-term gains.
After pairing like losses and gains, excess losses can offset either short- or long-term gains -- but think twice before using short-term losses to offset long-term gains, says Nayan Lapsiwala, a partner at Aspiriant Wealth Management.
Short-term losses are more valuable when they offset short-term gains, because short-term gains are subject to income-tax rates up to 37%, while long-term gains are taxed up to a 20% capital-gains rate.
"Most losses we're seeing now are short term, on new money invested after the election," Lapsiwala says.
If you end up with excess short-term losses this year, consider rolling them forward to offset future short-term gains.
Beware the wash-sale rule
To use losses to offset gains, you must adhere to the wash-sale rule, which forbids buying or selling the same stock or a substantially identical investment within the 30 days before and after harvesting losses.
If you run afoul of the rule, your loss offsets will be disallowed.
To maintain your target asset allocation without violating the wash-sale rule, you can repurchase similar investments.
"If you get out of GM ( General Motors) you can buy another automotive stock or an index that tracks the automotive sector," says Brian Schultz, a tax partner at Plante Moran.
Fund investors who sell losing shares can buy a mutual fund or ETF with similar exposure. But avoid buying essentially the same portfolio run by a different company, Schultz says.
For example, if you sell shares in Fidelity 500 Index Fund, which tracks the S&P 500, the IRS would probably frown upon using Vanguard 500 Index Fund as a stand-in, he says.
Instead, consider a fund that tracks the Russell 1000 index, which gives you exposure to the companies in the S&P 500 along with 500 other large companies.
Wash-sale rules apply broadly
If you sell a stock or fund at a loss in one account, be sure you keep tabs on activity in your other accounts, whether they are taxable or tax-favored retirement accounts such as a 401(k) or IRA, says Pam Lucina, president of the Northern Trust Institute.
"If you're selling for a loss in one account, you have to make sure you're not purchasing the same investment in another account," Lucina says.
Also consider your spouse's accounts. How the wash-sale rule applies to couples depends on their circumstances, Schultz says.
If one spouse usually has primary control over investments, even if each spouse has accounts in their own names the wash sale rule applies across their combined accounts.
"I couldn't sell Tesla in my taxable account for a loss and have my wife buy it in her IRA," Schultz says.
But if you and your spouse can prove you invest independently of each other, each with your own money and your own accounts, the loss offset would be permitted.
Don't miss losses in other asset classes
Losses can be harvested across your portfolio in different asset classes such as bonds and cryptocurrencies, and you can use losses in one asset class to offset gains in another.
Keep in mind that the wash sale rule doesn't apply to crypto assets, because they are considered by the IRS to be property, not securities.
But your sell-and-buy transactions must have economic substance and not be purely for tax purposes, says Matt Metras, an enrolled agent at MDM Financial Services.
If you sell Ethereum and buy it back five minutes later and there has been no change in the market, the transaction will appear purely for tax purposes, Metras says.
But given cryptocurrency volatility, the market can shift enough in brief periods for your transaction to be driven by reasons other than just taxes, Metras says.
"You could sell crypto, and then the president tweets something insane and the market goes up or down in minutes," he says. "That could change your motivation, and you could argue your transactions were not purely for tax purposes."
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March 22, 2025 04:00 ET (08:00 GMT)
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