It's a lesson that we all learned early in our
working life when we make money, we usually owe
taxes. But what happens when the opposite is true
and you lose money with the stock market taking a
beating in 2022, many investors looking at losses on
their portfolios despite the intention of boosting returns. And
one way to help lessen the blow is by harvesting
those losses to reduce your tax bill next year.
So joining me now is Katherine tuggle chief content officer
at her money. Catherine always a pleasure. It's
great to see you, you to Kristin. Okay
, so let's start by just getting it out there
. What exactly is a tax loss harvesting and how
does it work? So I think a lot of
terms in the financial world are pretty dang confusing,
thankfully. This one is pretty clear. You are
, you're gathering your harvesting your losses like a little
farmer, you're looking for every investment that you've had
that has been a loser and then you're trying to
pair it with a winner. So basically the goal
here is that you sell an investment that's lost money
, then you lose that loss to reduce your taxable
capital gains on a profitable investment that you sold so
that you don't owe taxes and december 31st is the
deadline to basically take those capital losses that will be
used to offset your capital gains for the year.
So that's why everybody's kind of talking about this.
Now we're down to less than a month to,
to harvest those losses, so to speak. So
, okay, not to be Debbie downer here.
But what if you're looking at your portfolio Catherine and
this might be the case for many of our viewers
and everything is down. Is there any way to
take advantage of this option? So, I mean
a lot of this hinges on your long term strategy
, right? So, so if you're in the
market for the long haul and you are a ride
out the losses person knowing that that rebound is coming
, then this is not for you, right?
This is really just for people who are looking at
their portfolio and they're saying, you know what,
this is down and I don't want to own it
anymore ever again. Um, and then they are
then selling that investment, um, in order to
avoid some of the tax penalty that they might face
if they also sold a winning investment. So,
so you know, this is not going to exist
for everyone in their portfolio, but if that's you
, if you've taken a look at the tech sector
this year and you're like, I need to rebalance
then then go for it. So I do want
to pull up this full screen Catherine that we were
showing um, while you were giving us that answer
and we see crypto has been the worst performer on
the year, down 50% followed by stocks, 22%
and then bonds 15% I think a lot of this
obviously we know applies to stocks, but what about
crypto and bonds can tax loss harvesting be true and
used for those assets as well. It's a really
good question. So, um, you can use
losses in one sector to offset gains made in another
. So let's say housing market, housing market's been
crazy good this year if you experience to gain from
the sale of your home, but you had big
losses in crypto, which I think that probably applies
to a few people out there. You can actually
strategize and pair those two together and offset some of
the taxes that you would be on target to pay
for your real estate gain by unloading some of your
crypto. And I think the term that people should
look at right is capital gains. Capital gains obviously
would be the gains, right Catherine that you would
use to offset any losses if you do want to
take advantage of this um tax loss harvesting. If
you will, if you want to call it that
. Yeah, yeah. You know, it's kind
of a dollar for dollar offset, right? So
if you lost$35,000 on a batch of stocks that
you're ready to unload, but you, you gained
35,000 on the sale of a home, you can
basically, that will equal out so that you're not
on the hook to pay capital gains tax on the
sale of your home. It'll kind of just be
a wash, good to know. And I see
remaining losses can be carried over to future years as
well. Can you talk to us a bit about
that? So let's say you don't have any gains
this year. Maybe you want to use those losses
for future years when you actually want to, when
you actually see some gains. Right? So yeah
, so you can carry over like, uh,
you can use the losses to offset up to$3,000
of your ordinary annual income every year. But that
can carry over, right? So you could use
$3,000 this year,$3,000 next year until you,
until you hit the maximum. Um, and that
can go on in perpetuity. The town Tax losses
don't expire until you die. So this could be
something that gives you that little$3,000 boost every year
. Now,$3,000 is not gonna make a huge
difference from year to year, but it's something,
yeah, I think that's a really good thing to
note. Especially as we know, prices are higher
across the board anyway, that people can save money
. Certainly is important. Time is ticking. No
. Catherine is almost the end of the year.
We've got the holidays upon us and I hope you're
having a happy holiday season. I do want to
ask you what else investors should know about as we
approach the end of the year. Any sort of
advice especially as people kind of try to plan ahead
for 2023 as well. Yeah. Yeah it's a
great question. Um This has been a weird year
I'm hoping next year is better. I will say
there is one important point with the tax loss harvesting
is that the I. R. S. Doesn't
really want you bouncing in and out of this same
stock bond or mutual fund just as like a tax
avoidance strategy. So there is something called a wash
sale rule which basically means that you can't sell what
you wanted to sell and then re buy it within
30 days. So you can't you can't be the
person who like buys the dress at Bloomingdale's and then
sees it go on sale for 30% and then returns
it and buys it back. The I. R
. S. Is not going to let you do
that. Uh I like that analogy Catherine. I
think many people can relate of course to a Bloomingdale's
dress. My final question for you here is 2023
almost upon us. Uh The r word keeps surfacing
recession when we have one, will we not?
What's the best way for americans and families to plan
and prepare themselves for a potential recession? Yeah the
one thing I hear over and over again from everybody
is that debt is the killer when a recession happens
because if you do lose income or you do lose
hours you're gonna have to put all your income towards
food and rent and healthcare in the essentials and those
credit card bills that you've let pile up. Or
the student loan debts that you may be that you
may have. Those might get put on the backburner
and that is gonna be a problem. Um,
So I would say if you do get a tax
refund check, if you do have some holiday money
coming in and you have debt that is on your
mind and on your balance sheet, pay it down
, pay it down. All right. Great advice
as always from Catherine to go, Chief Content Officer
Harmony Catherine, Great to see you and happy holidays --> .