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Are you looking to make the most out of your investments, even in a year where the stock market is strong but your portfolio might be suffering losses? Look no further! We have expert advice on how you can leverage down assets to score a tax break through a strategy known as “tax-loss harvesting.”
What is tax-loss harvesting, you ask? It involves selling losing brokerage account assets to claim a loss. When you file your taxes, you can use those losses to offset portfolio gains. And the best part? Once your investment losses exceed profits, you can use the excess to reduce regular income by up to $3,000 per year. It’s a tried and true strategy to lower investors’ tax bills, according to certified financial planner David Flores Wilson.
But wait, there’s more! After offsetting $3,000 in regular income, you can carry any additional losses forward into future years to offset capital gains or income. “Investors can benefit substantially over time” by tax-loss harvesting consistently throughout the year, Wilson said.
What to know about the wash sale rule
While tax-loss harvesting can be simple when you’re eager to offload a losing asset, it can get tricky when you still want exposure to that asset. This is because of the IRS guidelines known as the “wash sale rule,” which prevents you from claiming the tax break on losses if you rebuy a “substantially identical” asset within the 30-day window before or after the sale.
So, you can’t sell a losing asset to claim a loss and then immediately repurchase the same investment. But don’t worry, we have solutions for you!
How exchange-traded funds can help
Experts say that exchange-traded funds, or ETFs, can help investors avoid trouble with the IRS when it comes to the wash sale rule. The beauty of using ETFs for tax-loss harvesting is that there are many similar, but not identical, ETFs that could be exchanged for a losing one, according to George Gagliardi, a CFP and founder of Coromandel Wealth Strategies.
For example, many ETFs in the same sector use the same pool of stocks with different selection criteria. However, ETFs with identical indexes, like the S&P 500, “will run afoul of the wash sale rule” and the loss won’t be allowed, Gagliardi explained.
Ultimately, the IRS definition of “substantially identical” isn’t black and white and “depends on the facts and circumstances” of your case. When in doubt, consider reviewing your plan with an advisor or tax professional to make sure you’re safe from violating the wash sale rule.
Ready to make the most of your investments and lower your tax bills? Stay tuned to Extreme Investor Network for more expert advice on personal finance strategies!