Today’s video explores how tax loss harvesting works.
Notes
Tax Loss Harvesting
1. A capital loss or tax loss occurs when you lose money on an investment. When you have a REALIZED loss on a stock.
On January 1st, 2022 I bought 100 shares of SPY for $400. Today, December 20th, 2022 it’s worth $300, I have an UNREALIZED loss of $100 per share x 100 = -$10k.
I could hold on and wait for the market to recover.
Let’s assume we sell the SPY position and REALIZE the $10k loss.
2. This only matters in a taxable account.
-$10k realized capital loss. Implications
One: You can use this to offset $10k of realized capital gains. If I have realized gains that year and want to offset them, I’m incentivized to REALIZE some of the UNREALIZED losses in my other positions.
Two: I don’t have any capital gains this year to offset. You can also use the $10k of capital loss to offset up to $3k of earned income.
$100k of income
$3k realized loss
$97k of income pay taxes.
Tax Loss Harvesting
1) Investors selling losing positions to REALIZE or HARVEST the loss.
a) but… I want to make the money back if the stock recovers. Why not sell the stock to capture the loss and then rebuy it to maintain my exposure? The IRS has a RULE called the Wash Sale Rule: You can’t rebuy the same thing for at least 30 days or else it cancels out the sell.
b)but… I want to make the money back if the stock recovers, Replace SPY with a highly correlated alternate ETF.
Wealthfront or Betterment: RoboAdvisors They have software that does tax loss harvesting. But to make sure you don’t miss out when the market recovers they swap your investment out of one ETF and into similar ETF
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