You win some, you lose some—that’s the nature of investing. But when it comes to paying taxes, you might be able to turn an investment loss into a tax win through tax-loss harvesting.
It’s certainly a volatile time for investing. U.S. stocks and bonds were down in the same year at the same time, which has only happened three other times since 1928 (and never before have they both been down by double-digits in the same year as they were in 2022). If you took a chance on cryptocurrency, you might be feeling even more pain. CNBC reports that the digital currency industry lost nearly $1.4 trillion in 2022 after several bankruptcies and liquidity issues. But then there are money-making opportunities around each corner, too. You may find yourself winning big with certain investments but, given stock market uncertainty, feel the urge to cut (sell) and run.
So how do these investment gains and losses affect your taxes? When you sell an investment for a profit, the amount you make is subject to capital gains taxes. Investment income held for under a year is taxed as short-term capital gains determined by your ordinary income bracket. Long-term capital gains are still taxed, although the rates are much lower (capital gain rates). When selling an investment asset that has lost value, however, you can claim a capital loss. Capital losses will offset capital gains. If losses exceed gains, then the additional loss of up to $3,000 can reduce ordinary income. The strategy is called tax-loss harvesting, and it can be a valuable tax-saving tool when the market is unpredictable.
If you invest in and suffer losses in cryptocurrency, you may have even more opportunities with tax-loss harvesting. That’s because the losses aren’t currently subject to IRS wash sale rules, which prohibit a loss-harvesting tax break when repurchasing a “substantially identical” asset within a 30-day window before or after the sale. In short, you have a good chance of being able to reinvest crypto funds deemed as losses while still collecting a tax break from them, at least for the time being.
To capture the value of tax-loss harvesting on your 2022 taxes, you must have sold those losing investments last year. If you missed the deadline, plan ahead for 2023 and keep your eye on opportunities before the New Year strikes. If the tax-saving potential exceeds the $3,000 limit, the excess loss can be carried forward to a future year. Feel free to contact us with questions.