Last minute tips for harvesting tax losses for 2021


What would you like to know

  • Advisors should pay particular attention to clients who may have engaged in cryptocurrency trading during the year.
  • Clients should be careful when selling an investment just to offset capital gains.
  • Customers should watch out for wash sales issues if they want to reinvest the proceeds quickly.

The stock markets have done extremely well for many clients in 2021 – in some cases the gains may have been surprising enough to motivate the client to cash in their investments at a significant gain without much planning or advice.

While this can be seen as a positive development for many, it can also mean that many clients may be faced with a larger than expected year-end tax bill on unexpected capital gains. Customers have a few days to take action to prevent an unexpected tax impact from eroding their bottom line.

While tax-loss harvest strategies are an old hat for many advisors and clients, implementing these strategies correctly may take on new importance for clients who might have unexpected gains for 2021 – and advisers should pay attention. special attention to clients who may have entered cryptocurrency trading during the year. .

Capital gains taxes: the basics

Many clients are used to incurring a capital gains tax bill at the end of the year. They have even come to expect it. However, 2021 was unique for a number of reasons, meaning some clients might face long-term capital gains tax for the very first time.

Fluctuations in the cryptocurrency markets throughout the year may have prompted many investors to sell when cryptocurrency prices were at their peak. Since cryptocurrency is treated as property, these clients will be liable for capital gains tax on their profits – and it is no longer possible for these clients to go under the IRS radar when ‘it’s about declaring crypto gains.

Keep in mind that tax loss recovery strategies don’t apply to traditional retirement accounts, like IRAs or 401 (k), where funds grow on a tax-deferred basis. These distributions are subject to ordinary income tax on withdrawal, not capital gains tax.

Additionally, clients should remember the distinction between short term and long term capital gains. Long-term capital gains tax rates apply when the client has held the asset for a year or more. Long-term capital losses will offset long-term capital gains.

If the holding period is shorter, the rates will be taxed as short-term capital gains (which reflect regular tax rates).

Tax loss recovery strategy

First, any tax loss recovery strategy must be executed by December 31 for the loss to offset the gains of 2021. With the tax loss recovery strategy, clients will want to be careful of fluctuations in asset values. . Selling a capital asset at a loss in a year where the customer will also realize long-term capital gains may offset capital gains tax.

To execute a tax loss harvesting strategy, clients simply sell depreciated fixed assets to offset their capital gains for the year. These clients should also note that they can use up to $ 3,000 in capital losses to offset ordinary income for the year.

In addition, any denied capital loss can be carried forward to future years if it exceeds the client’s capital gains by more than $ 3,000.

As always, clients should be careful when selling an investment just to offset capital gains. Some investments can make sense in the long term even if they have performed poorly in recent years. These long-term gains are also an important issue when considering the client’s long-term tax outlook.


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