Tax Impact of Capital Gains and Losses in a Fluctuating Market

Being invested in the market has proved to be a wild ride this year. You may have already realized some significant capital gains and capital losses, but your 2022 tax situation is not final until year-end.

Here are some tips to help avoid market-related tax surprises for 2022:

  • Investments held in taxable, brokerage firm accounts — From a tax perspective, your cumulative gains and losses from executed trades during the year are what matter. (Unrealized gains and losses won’t affect your 2022 tax bill, although they can certainly affect your mental health.)
    • Having an overall loss for the year, meaning your realized losses in taxable accounts exceed your realized gains, you can claim a net capital loss deduction of up to $3K against your ordinary income.
    • If your taxable accounts for the year exceed your losses, you have a net capital gain. Short-term gains will be taxed at your regular federal income tax rate. Long-term gains will be taxed at the lower federal capital gain tax rates of 0, 15, or 20%.
  • Offset capital gain income by selling securities at a loss. Whether you have sold appreciated securities or sold some other capital asset (e.g. investment property, business assets, etc.), you can potentially offset recognized capital gains with tax loss harvesting. This is done by strategically selling securities at a loss which will offset the capital gain income and save tax. Even if you have no gains to recognize this year, you can still harvest a capital loss of up to $3,000 to offset other types of income.
  • Complete a ROTH conversion in a down year to save tax. Converting securities held in a traditional IRA into a ROTH IRA is a taxable event. If you can complete this during a down market the amount that is taxable on the conversion will be less than when the market is up. This can result in substantial tax savings on the conversion. In addition, you will have the benefit of tax free growth when the market rebounds and the assets appreciate in the tax free ROTH account.
  • Investments held in a tax-favored retirement account have no current tax impact — Tax-favored retirement accounts include a 401(k), traditional or Roth IRA, or a SEP account. While the market swings affect your account value, they have no impact on your taxes while the funds remain in the account.

As mentioned earlier, your tax results for 2022 are up in the air until all the gains and losses from trades executed during the year are tallied up. If you would like to learn more about this, we are more than happy to sit down with you and guide you through your personal taxes.

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