Tax-Loss Harvesting

If investments you sold in 2019 lost money, you may find some solace in the IRS tax code. You can deduct certain losses from your taxable income – called tax-loss harvesting – when you understand the rules. Here they are briefly:

TERMS DEFINED

For starters, the IRS has separate tax rates for long-term investments – those which you have held at least a year. The capital gains tax rate on net realized long-term investment gains, or capital gains, is 15% for most people. You realize losses and gains only on investments you sell, not on those you still hold. Investments held for a year or less trigger ordinary income tax rates, which are typically higher.

The IRS taxes some or all net capital gains at 0% if you’re in the 10% or 12% ordinary income tax brackets. You’ll pay 20% on net capital gains if your taxable ordinary income exceeds $434,550 if filing as a single, $488,850 if filing jointly or as a qualifying widow, $461,700 if you are a head of household and $244,425 if married and filing separately.

THE CALCULATION

To figure net losses, subtract what you realized from selling your investment from the original amount invested and then deduct any sales charges. If your realized capital losses are greater than realized capital gains, deduct up to $3,000 a year, or up to $1,500 if married and filing a separate return. You may carry forward any losses over this annual cap to the next tax year.

LONG-TERM VIEW

Don’t sell investments just for tax reasons. Keep those that lost money last year if they continue to have long-term prospects and sell winners if they don’t fit your investment strategy.