It might be next on the list. So look instead of ringing the bell sounding the alarm and panicking. I want to help you take advantage of a tax loophole that actually allows you to use your investment losses to save on taxes. If you are an investor right now and you are experiencing some losses somewhere in your portfolio, then stick around to learn how you can use these losses to benefit you on your next tax return. My name is sherman the cpa and i am going to walk you through this tax loophole step by step, and all i ask for in return is that you smash the thumbs up button below to help this video reach more investors, just like yourself, alright, so the Name of this tax strategy is called tax loss, harvesting tax loss harvesting is when you sell securities like stocks or assets like real estate with unrealized losses. Now this sounds way more technical than what it actually is so lets break this all the way down. Lets start with securities. Securities are basically publicly traded investments like stocks, bonds, cryptocurrency options, index funds, mutual funds or publicly traded real estate investments, but wait thats, not it. You can also use this strategy with any assets. You own, like your primary residence, rental properties, cars boats, equipment or any tangible asset that you can physically touch or put your hands on. So if you buy securities or assets and the market price right now is below the price you purchased it at then technically you have an unrealized loss.

For example, if you purchase 100 000 of stocks in december of 2021 and its worth 60 000 today, then technically you have an unrealized loss of forty thousand dollars, because your stocks are now worth forty thousand dollars less than what you paid for them and the same Concept would apply if you bought crypto real estate or any asset that decreased in value. Now here is the key unrealized losses. Do absolutely nothing for you, which is why they are unrealized. This means that you do not directly receive any tax benefits due to these investments. Losing value – and that is where tax loss harvesting comes into play. Tax loss harvesting occurs when you sell these investments to recognize the tax loss you see whenever you sell something, it creates a taxable event. You dont sell it its no taxable event and if you profit from the transaction, then technically you would have a capital gain. If you lose money on the transaction, meaning you sold it for less than what you purchased it for then you would have a capital loss. So tax loss harvesting is the process of gathering up all of those losses in your portfolio selling them to create the taxable event and using the tax loss to offset your income. Now, of course, no one invests money to lose money, and that is far from what im suggesting what were trying to do here is take advantage of the fact that your investments are down in value and by selling them.

The irs recognizes that loss and then you can use the proceeds you receive from the sale to buy. Other investments now well talk about this a little bit more later, but let me first make sure you understand the types of income you can offset with the tax losses that you create. So the first and most significant type of income you can offset are capital gains. Now, capital gains occur when you sell investments or asset and you make a profit and you can offset 100 of your capital gains with capital losses. For example, lets say: you sold some stocks in january of 2022 for a 10 000 profit, but lets say you sold some crypto at a 20 000 loss in june of 2022, resulting in a twenty thousand dollar loss. If thats the case, you will be able to use ten thousand dollars of the twenty thousand dollar loss to offset one hundred percent of your capital gains. So, basically, your loss would completely wipe out your ten thousand dollar gain and you will pay zero taxes. As a result, but now you still have ten thousand dollars in losses remaining well, what happens with that? Well lets move on to the second type of income. You can offset ordinary income now ordinary income is income you earn from working. So this includes any business income, wages, salaries, tips or commissions. You earn from actively working for a business, so your capital losses can offset this type of income, but heres the thing it is limited to only three thousand dollars so lets say you made one hundred thousand dollars in ordinary income.

Well, even though you have ten thousand dollars in capital losses left, you can only use three thousand dollars to offset your income, so this is better than nothing, and this will result in you paying lower taxes, but what happens with the remaining seven thousand dollars in losses? You did not use here well, it rolls forward to future tax years, so any unused capital losses can be carried forward indefinitely. Now this is big, because you can essentially stack up tax losses to offset income for the rest of your life, and most people will have capital gains at some point in the future, whether its from selling stocks selling real estate or selling their car. Which is why many financial advisors look for tax loss, harvesting opportunities on an annual basis for their clients anyway, like i mentioned earlier, you can offset 100 of your capital gains and also 3 000 of your ordinary income with capital losses. Now, with that said, lets go back to a point i made earlier about not investing to lose money. So, like i said, no one invests their hard earned money to lose it, and that is certainly not the point of tax loss. Harvesting investors invest to make money, but when those investments dont work out as planned or maybe the market goes down entirely, then tax loss harvesting may be a great strategy to consider. But still, if you are a long term, investor selling an investment might sound counter intuitive.

Like sure, you might recognize a loss and save a few dollars in taxes, but at the same time you dont want to miss out on the potential upswing of the investment too right. Look, i get it, and this is certainly something worth considering, but one thing you could do is consider selling your investments at the loss to save on taxes and then immediately buying another investment with similar performance to what you sold or an investment that you just think Will increase in value take a look at this chart. These are two completely different investments, but their performance is very similar, so if you sold one of them, while the investment was down in value and purchased the other, then you would recognize the loss on your tax return and still participate in the upswing of the investment. As the market recovers so effectively, you will not really lose any money now. The irs is aware of strategies like this, so it is important that you understand a specific rule. They put in place called wash sales. So if you sell an investment at a loss and by the same exact investment within a 30 day time frame, then it is considered a wash sale. This means that your tax loss would be disallowed now keep in mind. This is only if you buy the same exact investment within 30 days. The example i provided consisted of two different investments, but their overall performance was similar, so this would be okay as long as the investments are technically different from each other.

Anyway. I know i just walked you through a lot, so let me give you the three main steps you need to take. If you want to start using tax loss harvesting as a strategy number one find losing positions in your portfolio, number two sell those losing positions to create a taxable event. In other words, a loss and number three use the tax loss to offset income on your return. Again, if you want to stay invested long term, you can use the proceeds from your cell to just invest into something else. If you enjoyed this video – and you want my full framework to reduce your taxes by thousands, then click the link in my bio for a discount on my tax savers course at mycpacoach.com.

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