During 2022, the stock market has been down, but there have been some bright spots along the way. As the year ends, you should consider making some moves to make the best tax use of losses (on stocks that you still own) and actual losses realized from the sale of investments.
Tax rates on sales
Individuals are subject to tax rate as high as 37% on short-term capital gains and ordinary income. But long-term capital gains on most investment assets receive a better tax treatment. They’re taxed at rates ranging from 0% to 20% depending on your taxable income (inclusive of the gains). High-income taxpayers may pay an additional 3.8% net investment income tax.
Sell at a loss to offset earlier gains
Have you realized gains earlier in the year from sales of stock held for more than one year (long-term capital gains) or from sales of stock held for one year or less (short-term capital gains)? If so, you should take a closer look at your portfolio and consider selling some of the losers — those shares that now show a paper loss. The best tax strategy to consider is to sell enough losers to generate losses to offset your earlier gains plus an additional $3,000 loss. Selling to produce this loss amount is a tax-smart idea because a $3,000 capital loss (but no more) can offset the same amount of ordinary income each year.
For example, let’s say you have $10,000 of capital gain from stock sales during 2022. You also have several losing positions, including shares in a real estate stock. The real estate shares currently show a loss of $15,000. From a tax standpoint, you should consider selling enough of your real estate stock shares to recognize a $13,000 loss. Your capital gains will be offset entirely, and you’ll have a $3,000 net loss to offset against the same amount of ordinary income.
What if you believe that the shares showing a paper loss may turn around and generate a profit at a later date? In order to sell and then repurchase the shares without forfeiting the loss deduction, you must avoid the wash-sale rules. This means that you must buy the new shares outside of the period that begins 30 days before and ends 30 days after the sale of the loss stock. However, if you expect the price of the shares showing a loss to rise quickly, your tax savings from taking the loss may not be worth the potential investment gain you may lose by waiting more than 30 days to repurchase the shares.
Use losses earlier in the year to offset gains
If you have capital losses on sales earlier in 2022, consider whether you should take capital gains on some stocks that you still hold. For example, if you have appreciated stocks that you’d like to sell, but don’t want to sell if it causes you to have taxable gain this year, consider selling just enough shares to offset your earlier-in-the-year capital losses (except for $3,000 that can be used to offset ordinary income). Consider selling appreciated stocks now if you believe they’ve reached (or are close to) the peak price, and you also feel you can invest the proceeds from the sale in different properties that’ll give you a better return in the future.
These are just some of the year-end strategies that may save you taxes. Feel free to contact Wegner CPAs to discuss these and other strategies that should be put in place before the calendar turns to 2023.