What does Tax-Loss Harvesting and Tax-Gain Harvesting mean to you?

How does IRS Rule on Wash Sales work?

Tax Loss Harvesting: Getting a tax break when you sell a losing investment.

Wash sale is when you sell a security at loss for a tax benefit and buy the same security or similar security back.

Wash Sale Rule

If you want to sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return. However, you will be able to add the amount of the loss back onto the cost basis of the replacement security, which can help with taxes later.

In addition, the holding period of the original security gets tacked onto to the holding period of the replacement security.

Securities that are covered by the Wash Sale Rule

Stocks, ETFs, Mutual Funds. If you sell a stock for a loss and buy the option on the same stock, Wash Sale Rule applies also.

The wash-sale rule applies across all your accounts including IRA accounts and even to your spouse's accounts.

Tax-Gain Harvesting

If you have winners in your portfolio, conventional wisdom says to delay collecting your capital gains as long as possible.

However, conventional wisdom can sometimes be wrong. Strategically selling your winning investments could reduce current and future taxes.

Three situations in which tax-gain harvesting may be an applicable strategy.

1. Lower income and lower tax bracket this year for whatever reason could provide an opportunity to realize long-term gains either tax-free or at a lower tax rate.

Capital Gains Tax Rate for 2022:

Single: $0 to $41,675 = 0%, $41,676 to $459,750 = 15%, $459,751 and more = 20%

MFJ (Married Filing Jointly): $0 to $83,350 = 0%, $83,351 to $517,200 = 15%, $517,201 and more = 20%

2. You want to offset Losses:  if you've realized capital losses this year, consider realizing the equal amount of capital gains. The losses effectively zero out the gains, likely eliminating the capital gains taxes that might otherwise be due.

3. You want to reduce concentrated positions to reduce the risk and rebalance the portfolio.

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