It’s the fourth quarter. Do you know where your 2023 tax burden falls?

If you have capital gains, you may be subject to greater tax implications for your 2023 filing. However, there are ways to offset those gains and minimize your tax burden.

Capital gains are profits earned from the sale or transfer of capital assets, such as stocks, real estate, or valuable personal property. These gains are considered the difference between the purchase price (also known as the cost basis) of the asset and the selling price. There are two main types of capital gains: short-term and long-term, and they are both subject to taxation.

Tax-loss harvesting is one strategy to minimize your tax liability.

The idea is to sell investments that have decreased in value to offset the gains on other investments. This strategy is particularly useful for reducing the amount of taxable gains, ultimately lowering the investor’s overall tax bill. A caveat: there are limitations on how this strategy can be deployed.

HOW IT WORKS

1. Investments with Losses are Identified: Your advisor can help you review your portfolio to identify assets that have declined in value since they were acquired. These are the investments with unrealized capital losses.
2. Sell Depreciated Investments to Offset Capital Gains: Losses are “realized” upon the point of sale and can then be used to offset an equal amount of capital gains. For example, if you had $10,000 in realized capital losses and $10,000 in realized capital gains, the losses would offset the gains completely, resulting in no capital gains tax liability. Once the positions are sold, your investment advisor will purchase a new position in a similar asset class to keep your investment allocation and risk exposure the same as they were before the sale.
3. Carry Forward Unused Losses: You can use up to $3,000 to offset ordinary income and remaining losses carryforward to future years.

LIMITATIONS

Be mindful that tax-loss harvesting only applies to investments held in taxable accounts. Investors should also be aware of the “Wash Sale” rules: your tax-loss could be denied if, within 30 days of selling the investment (either before or after), you invest in something that is identical or in the IRS’ words, “substantially similar” to the one you just sold.[i]

TALK TO AN ADVISOR

In short, while tax-loss harvesting is a proactive and valuable tax-saving plan, you should not rely on it wholly for your overall investment strategy and long-term financial goals. It’s essential to consider your individual circumstances and consult with a tax professional to ensure compliance with tax laws and regulations.

At Larson Financial Group, Larson’s in-house tax experts work in tandem with your advisor. Together they carefully analyze the financial and tax implications of selling investments, while considering the long-term impact on your portfolio and investment goals.

How you approach capital gains can play a significant role in investment decisions, financial planning, and offsetting tax liabilities. It’s never too early to plan ahead.

Step into 2024 with confidence and talk with your advisor today to make sure you have a plan in place for any capital gains, and how to utilize tax-loss harvesting to lower your tax liability. Depending on your situation, your advisor may introduce you to our in-house, tax-strategy gurus at Larson Tax Partners, so you can experience the benefits of having one cohesive team working with you.

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[i] https://www.nerdwallet.com/article/taxes/tax-loss-harvesting

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