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How Tax-Loss Harvesting Can Offset Gains

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Investors with some huge gains and huge losses might want to consider what is called tax-loss harvesting.  The right planning now can potentially offset gains for next year's tax filing. But, what is it? How does it work?

Video Transcript:

Tracy Byrnes: So the market's been really sketchy lately, so people have seen some gains. They have losses. They have a combination of both. You get your tax return and you can't believe all the trading that was done the year before and you start to panic.

So, especially this year, we are seeing volatility in the market. You don't want to get caught off guard when you file your tax return next year. So you really should be thinking about this now. Lisa Greene-Lewis, CPA and TurboTax expert, is here with us right now. So let's talk about this. Offsetting gains and losses-- what should people be thinking?

Lisa Greene-Lewis, CPA and TurboTax expert has the complete guide in the video above.

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Lisa Greene-Lewis: Yes, so if you've had some huge gains and you have a losing stock and it's just not going to go up, you could sell that losing stock and offset your losses against your gains. And then you can also carry forward those gains and offset your ordinary income. Like if you have W-2 income from work, you can offset up to $3,000 of those losses against your income.

Tracy Byrnes: Right. So especially come the end of the year, really start to think about this. Look at your portfolio. Be super careful of the wash-sale rule, which basically says, if you sell the loss, you can't buy it back [? for ?] 31 days. So just be careful of that. But it's worth looking at your portfolio.

We should also talk about the difference between long term and short term. Can you explain that, as far as the capital gains rates go?

Lisa Greene-Lewis: Yes, so your tax rate depends on how long you've held the investment. So if you sell your investment that you've held on to for more than a year, you're going to be taxed at, in some cases, it's a lower favorable rate than what you're taxed when you file your taxes. So long-term capital gains rates are zero percent, depending on your income, 15%, or 20%. And then short-term capital gains, if you sell in under a year, then you will be taxed at your ordinary tax rates. And those are the tax rates that you're taxed when you file your taxes.

So it's really-- as you said, Tracy, you want to look at planning. If you're looking at selling a certain stock, you want to look at if you hold on to it for over a year, what your taxes will be. Or if you sell under a year, what your taxes will be.

Tracy Byrnes: Right. And this can get really confusing. I mean, people trade in and out of things often. So TurboTax actually has a bunch of stuff to help people get organized, doesn't it?

Lisa Greene-Lewis: Yes. So as a planning tool, we have a capital gains calculator. And you can use it as a planning tool, or you can see what you'll be taxed on something that you've already sold. But you can take a look. If you're planning to sell, it'll let you know what your taxes will be if you sell over a year or under a year.

And then, also, when you go to do your taxes, our TurboTax Premier, it automatically imports up to 10,000 stock transactions at once, and up to 4,000 crypto transactions at once from your financial institutions and crypto platforms. So it really eliminates that manual entry and also helps you accurately report your gains and losses.

Tracy Byrnes: Now I'm old enough to remember manual entry. Keep track of this stuff. Pay attention to your portfolio. With so much volatility this year, offsetting gains and losses should be top of mind.

Lisa Greene-Lewis, thank you for taking the time with us.

Lisa Greene-Lewis: Thank you for having me. 

Editor's note: Video produced by TheStreet's Zach Faulds

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