As we approach the year-end, now may be a good time to look at your non-retirement brokerage account and decide whether it may be appropriate to sell some securities.
Why your non-retirement brokerage account? In general, distributions from retirement accounts like IRAs and 401(k)s are taxed at ordinary income rates because contributions are pre-tax. If you sell securities with losses inside of your IRA or 401(k), you realize losses without receiving a tax benefit. In such a situation, it may be better to wait for the security to recover rather than sell it.
If you sell securities at a loss in your non-retirement brokerage account, you may record that as a capital loss on your tax return. This means, if the securities have lost value over time, and you have owned them for 366 days, you may claim a long-term capital loss. Conversely, you may sell securities held for the same period at a gain in your non-retirement brokerage account to offset the losses. When you sell securities with gains while simultaneously selling securities with losses, you may have an opportunity to net the activity as either a loss or gain.
Of note, when or if you sell your securities, you will no longer own them but may have cash available to either rebalance your portfolio or invest in different securities.
Though no one really cares to lose money, harvesting losses from your brokerage account may provide the benefit of reducing your taxable income. Tax-loss harvesting offers pros and cons to investors, but it is not appropriate for every portfolio. Ask your financial planner or tax advisor about whether tax-loss harvesting may be appropriate for you.
Wendolyn Forbes is a CERTIFIED FINANCIAL PLANNER™ with Wealth Transition Finance, A Member of Advisory Services Network, LLC. Wendolyn is a fee-only financial planner and member of the National Association of Personal Financial Advisors (NAPFA).
CFP Board owns the marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the U.S.
This material is provided as a courtesy and for educational purposes only. Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. Consult your own legal or tax professional for information concerning your individual situation.
Originally published in the November 2023 issue of Positively Haywood.