The Silver Lining of a Down Market
Nobody enjoys seeing red numbers in an investment portfolio.
But a market decline can create a valuable tax opportunity. Smart investors may sell losing investments to reduce taxes on profitable ones through a strategy called tax-loss harvesting.
How the Math Works
When you sell an investment for less than you paid, you create a capital loss.
That loss can offset capital gains from investments you sold at a profit.
For example, suppose you have:
- A $10,000 capital gain from one investment
- A $7,000 capital loss from another investment
The loss may reduce your taxable net gain to $3,000.
If your total losses exceed your total gains, you may generally deduct up to $3,000 against ordinary income, such as wages or business income.
Unused losses can usually carry forward to future tax years.
The Wash-Sale Trap
The biggest mistake is selling an investment for a loss and buying it back too quickly.
Under the wash-sale rule, your current loss deduction is generally disallowed if you purchase the same or a substantially identical investment within the period beginning 30 days before the sale and ending 30 days after it.
In most taxable-account situations, the loss is deferred and added to the replacement investment’s cost basis. It is not necessarily lost forever.
The rule may also apply when a spouse or another account purchases the replacement investment. Transactions involving retirement accounts can create even harsher results.
The Smart Swap Strategy
You do not always need to sit in cash while waiting out the wash-sale period.
You may be able to sell the losing investment and purchase a similar, but not substantially identical, asset.
For example, you might replace an individual technology stock with a diversified technology-sector fund. This may preserve some market exposure without immediately repurchasing the exact investment.
Be careful with nearly identical index funds or share classes. A tax advisor should review the replacement before you trade.
Turn Your Portfolio Losses Into Tax Savings
Don’t let a market dip go to waste without harvesting the tax benefits. Let our advisory team review your portfolio and execute a year-end tax-loss harvesting strategy that keeps you compliant with IRS rules. Contact us today or log into our Client Portal to schedule your wealth strategy session.
📧 Email: oshamsi@oscpatax.com
📞 Phone: (214) 253-8515
General information only, not tax advice. Always consult a tax professional to evaluate your specific circumstances and state rules.
