By: Andrew T. Gardener, CFP®
Silver Lining
One of the few silver linings in a year when so many investments are down is that the IRS allows investors in non-retirement accounts to get a tax benefit by “realizing” (selling) securities at a loss. There are two potential benefits. First, any realized losses may offset any realized capital gains taken in the same year. Second, up to $3000 of additional losses, over and above any used to offset realized gains, may be deducted from the taxpayer’s gross income. If the net losses exceed $3000, the IRS allows the taxpayer to “carry” those losses forward to use them in future years, either against subsequent realized gains or against subsequent gross income.
Wash Sale Rule
Investors must, however, watch out for the “wash-sale rule,” which states that in order to get the full deduction on the loss, the investor may not reinvest in that same (or substantially identical) investment for 30 calendar days.
Lack of Coordination can be Costly
For those with multiple custodians or multiple advisors, it is essential to have someone oversee all of your accounts. Here’s why: Suppose you have two advisors working independently. Advisor-A decides to sell your META stock (down some 60% this year) to take a tax loss and therefore create a tax deduction for you. At the same time, advisor-B is looking at how much META stock is down and thinks it’s a good opportunity to add it to your portfolio. If those two transactions take place within 30 days of each other, the wash-sale rule becomes effective and the tax deduction on the loss is voided. By the way, the purchase does not have to take place after the sale for the wash-sale rule to become effective. If advisor-B bought you META stock less than 30 days before advisor-A sold it, the wash-sale rule is also effective. In other words, no tax deduction. So the wash-sale rule spans 61 days – 30 before the sale as well as 30 after the sale.
Who’s Your Family CFO?
Whether you serve as your own family CFO or you engage with a professional Family CFO, your family ought to have one to serve as your advocate to help you navigate the nuances of complex investment tax laws, in coordination with your CPA or tax attorney.