• 165 Passaic Avenue, Suite 411, Fairfield, NJ 07004
  • Monday-Friday 9am - 5:30pm
  • 973-439-7200
January 6, 2022

End-of-Year Tax Strategies for Stock Market Investors

stock market investors

Carefully structuring capital gains and losses may allow you to save taxes as the end of the year approaches.

If you have any losses on investments this year, you may have certain opportunities to offset gains with losses. For instance, if you lost money on some stock this year but you have other stock that’s appreciated, you might consider selling the appreciated assets before December 31 if you think the assets’ value has peaked.

Short-term capital losses offset short-term capital gains before offsetting long-term capital gains—by the same token, long-term capital losses will offset long-term capital gains before offsetting short-term capital gains. In computing your adjusted gross income (AGI), up to $3,000 (or $1,500 if you’re married filing separately) of total capital losses in excess of total capital gains may be used as a deduction against your ordinary income.

On ordinary income and short-term capital gains, you’re subject to federal tax at a rate as high as 37%. However, most long-term capital gains on investments are treated more favorably—depending on your taxable income (inclusive of the gains), they’re taxed at rates that range from zero to 20%. There’s also an additional 3.8% net investment income tax on net gain and certain other investment income for high-income taxpayers.

Because of this, it’s best to avoid offsetting long-term capital gains with long-term capital losses. Instead, it’s more valuable to use long-term capital losses to offset short-term capital gains or up to $3,000 of ordinary income per year. This means that you'd need to avoid taking long-term capital losses in the same year as your long-term capital gains.

However, investment factors must be considered in addition to tax factors. If there’s a significant risk that an investment’s value will decline before you can sell it, you won’t want to defer recognizing gain until the following year. You also won’t want to risk increasing your loss on an investment by deferring a sale until the next year if you expect the investment to decline in value.

Instead, you’ll want to take steps to prevent long-term capital losses from offsetting long-term capital gains, but only to the extent that taking the losses in a different year than the gains makes sense within a good investment strategy.

If you expect to realize net capital losses next year that are in excess of the $3,000 ceiling but you haven’t yet realized net capital losses for 2021, you may want to consider accelerating some of the excess losses into this year—these losses will then offset current gains and up to $3,000 will be deductible against ordinary income in 2021.

It may be worth recognizing paper losses or gains on stocks this year for the reasons mentioned above. However, this stock may also be an investment that’s worth holding in the long term, and you aren’t allowed to sell stock to establish a tax loss, then buy it back the next day. Under the “wash sale” rule, a loss cannot be recognized if substantially identical securities are bought and sold within a 61-day period ranging from 30 days before the date of sale to 30 days after.

However, it may still be possible to realize a tax loss if you:

  • Buy more of the same stock, then sell the original after waiting at least 31 days. In this case, you risk downward price movement in the interim.
  • Sell the original holding, then buy the same securities after at least 31 days. In this case, you risk upward price movement in the interim.
  • Sell an original holding of mutual fund shares, then buy shares in another fund that has a similar investment strategy.
  • Sell the original holding but buy similar securities in other companies in the same industry. This will rely on the prospects of the industry instead of the prospects of the particular stock.

You can save tax by carefully handling capital gains and losses. If you need more information about these strategies, contact us.

linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram