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Turning Investment Losses into Tax Gains

Turning Investment Losses into Tax Gains

When markets become more volatile and your investments seem to be doing poorly, it can become worrisome for your future plans. You may wonder how the longevity of your investment is being impacted or you may wonder if you will be able to retire at the time in which you planned.

Seeing account values going down is scary, but if handled correctly, you can earn capital gains tax credits on the investment losses by utilizing the tax-loss harvesting strategy.

Tax-Loss Harvesting, Explained

When selling investments like mutual funds or stocks at a loss, these losses can be used to offset the gains made by other investments during that tax-cycle. These losses will then cancel out gains or personal income made of equal value to the losses, deferring them and their incurred income taxes until a future tax period. The capital gains are not eliminated, but offsetting the immediate tax-burden during a rocky market can make a big difference.

If an investor sells investments at a loss but has no gains to offset, that loss can be carried over to the next tax-cycle to offset future gains, with no expiration date. [1]

Tax-Loss Harvesting, When ToDo It

When your income or gains from investments are higher than normal, utilizing the tax-loss harvesting strategy can reduce your tax-burden for the year and allow you to keep your tax-rate relatively unchanging.

Knowing when to pull the trigger on tax-loss harvesting is crucial to offsetting losses in the right way. Being cognizant of which years will be ideal for making your asset adjustments and staying up to date on current and changing rules for tax-loss harvesting, such as the Wash-Sale rule (which prohibits the claiming of losses if your assets were reinvested in a similar fashion within 30 days of the original sale), will allow you to make the best decisions for minimizing your tax burdens. [2]

Arguments from Both Sides

Some will tell you that tax-loss harvesting is a clever way to turn a bad situation into a positive one. Others might tell you that tax-loss harvesting requires a certain level of expertise and that it can backfire easily, even when done by professionals. [3] In general, a good rule of thumb is to not sell investments solely for tax purposes, but when used as part of an overall financial plan and investment strategy, tax-loss harvesting can be useful and effective when necessary.

Executing strategies such as tax-loss harvesting can be difficult to do on your own. If you are concerned about your investments or potential tax burdens, or have other retirement concerns, please feel free to schedule a complimentary financial review with Moore’s Wealth Management.

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This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.

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