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Despite a strong year for the stock market, your portfolio may still be saddled with losses. But experts say it's possible to leverage your assets to get tax breaks.
This tactic, known as “loss recovery,” involves selling loss-making brokerage account assets to cover losses. You can use these losses to offset your portfolio's gains when filing your taxes. Once your investment losses exceed your gains, you can use the excess for: reduce regular income Up to $3,000 annual increase.
“Tax loss recovery is a proven strategy for lowering investors' taxes,” said David Flores Wilson, a certified financial planner and managing partner at Sincerus Advisory in New York.
After offsetting the $3,000 in ordinary income, investors can carry forward additional losses into future years to offset capital gains or income.
Wilson said that by collecting tax losses consistently throughout the year, “investors can earn significant returns over the long term.”
What you need to know about wash sale rules
If you want to get rid of your loss assets, recovering your losses will be easier. However, it is difficult if you still want to make the assets public.
That's because of guidelines from the IRS known as “.This is a rule that prevents you from claiming tax relief on losses if you repurchase a “substantially identical” property within 30 days before or after the sale.
In other words, you cannot sell a losing asset to claim losses and then immediately buy back the same investment.
How exchange traded funds can help
Wash sale rules are a challenge, but exchange-traded funds (ETFs) could help investors avoid trouble with the IRS, experts say.
George Gagliardi, CFP and founder of Coromandel Wealth Strategies, says, “The advantage of using ETFs to recover losses is that there are many similar, but not identical, ETFs that you can exchange your losses with. ” he said. Located in Lexington, Massachusetts.
For example, many ETFs in the same sector, such as value stocks, emerging markets, or small-cap growth stocks, use the same pool of stocks with different selection criteria, he said.
However, for ETFs with the same index, S&P500the loss is inexcusable because it “violates wash sale rules,” Gagliardi said.
Ultimately, the IRS definition is “substantially the sameThe agency says it's not black and white and depends on the “facts and circumstances” of your case.
If in doubt, consider having an advisor or tax professional review your plan to ensure you don't violate wash sale rules.
