| Selling at a loss is something that many of us have gotten very accustomed to lately. With the markets in nonsensical disarray, now is a great time to learn how to use this to your advantage. Selling at a loss is an emotionally painful thing, especially to an investor’s ego when they thought they’d done their due diligence. Despite the agony it may cause, it’s an inevitable aspect of investing that we make work in our favor. Yes, this is about taxes When you sell a stock, receive a dividend that isn’t reinvested, or sell other assets like property, you usually incur a capital gains tax on the profit. As we’ve been over and detailed before, capital gains are a tax specifically created for taxing and tracking the sales of equities and assets that lie outside of ordinary income, and something all investors must contend with. The good news is that, well, the tax code wants you to minimize your tax bill so you’re incentivized to invest, and that’s where tax-loss harvesting (TLH) comes in. It helps you turn a negative into a positive. How to TLH When your tax bill is calculated every year, the amount owed is based on your total income from investments, minus your cost basis for those investments. What you paid for the investment is subtracted from what you profited, and because of that, investments that you sold at a loss end up decreasing your tax bill. By using tax-loss harvesting, you can decrease the amount of your taxable capital gains if you strategically sell positions that are presently sitting at a loss. The amount of money you have in your investment account doesn’t change, it’s just that you’ve converted some open positions into cash instead to pay less in taxes this year. For example: If you made $10,000 on all sales in your brokerage account this year, but in November you got caught holding the bag on $GME again to the tune of $2,000, you can sell that bag and reduce your capital gains income to $8,000. The difference it makes on your tax bill will depend on your income bracket, and if you held the stock for over a year (long-term gains) or not. It’s way more legal than it sounds Tax-loss harvesting is perfectly legal. The IRS can’t exactly say “hey guys, you’re not allowed to sell positions that are at a loss in December to decrease your tax bill for 2022.” That would be ridiculous. They do try to curtail any blatant harvesting though. The IRS has placed somewhat of a safety net underneath the loss harvesters known as the wash sale rule, which essentially prohibits investors from buying back the same or any “relatively identical” security within 30 days of selling a position at a loss. That “identical” part is where the ambiguity lies, and is sometimes open to interpretation. For most people though, this isn’t an issue, and can easily be avoided by simply staying away from the stocks you sold for the next month before buying your positions back up again. Take this related lesson on this topic and earn Dibs 🟡 while you're at it:
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