In investing, losses happen. By selling losing investments to offset capital gains, you can reduce your overall tax liability and turn a negative into a positive. Tax-loss harvesting isn’t for everyone because not all investors have brokerage accounts, and certain rules and restrictions can limit its benefits. If you are considering utilizing the strategy, there are a few things you need to know.

1.   Tax-loss harvesting only applies to taxable accounts, not tax-deferred accounts like 401(k)s and Roth IRAs. 

2.   Although you can offset an unlimited amount of capital gains per year, only a limited amount of investment losses can be deducted from ordinary taxable income. 

3.   The “Wash-Sale” rule restricts when an investor can purchase assets after selling losing investments. If you were to sell at a loss, then attempt to buy the same or similar asset within 30-days before and after the sale, the IRS will reject the tax-loss benefit. This pertains to stocks, bonds, mutual funds and any asset an investor may hold in a brokerage account.

4.   Everyone in the household must abide by the 61-day buy/sell window.

5.   Cross-account tracking of all financial accounts and institutions can invalidate harvested tax savings when a spouse or family member violates the wash-sale rule.

When the market is volatile investors need to think strategically to offset losses. Tax-loss harvesting can be useful to high-income earners holding taxable assets that have dropped below their purchase price, and investors facing high capital gains. If you have questions or would like to schedule a portfolio review, contact Alloy Wealth at 800-689-3935.