Two years ago I made about $10k on a realized short term gain via stocks. I then lost this entire gain last year, and had a need for cash so the loss is realized. Anything I can do to minimize my loss since I already paid the short term gains tax?
There’s really nothing you can do for this particular situation, except to continue to record this loss on your tax return so that you can use it to offset a potential gain in the future… However, this provides a good learning opportunity to showcase how tax-loss harvesting can potential impact your situation in the future. Here’s how:
If you are comfortable buying and holding an investment for a long term potential return, then it should be understood that the investment will experience periods of both declines and growth. When the decline occurs, it may be wise to explore selling the investment, realizing a loss, and buying something similar but sufficiently different to satisfy the IRS wash sale rule. If you’re able to do this, then there’s potential to carry this loss forward to offset future gains when they occur.
I should also note that perhaps the best tool an investor can have is an agile need for withdrawals from their portfolio. Notice how your short-term strategy when you gained $10k in the first year, and subsequent need for withdrawals in the second year, had ultimately led to an unfavorable tax situation and a simultaneous depletion of your invested capital. If you can anticipate your cash flows you have a better chance at crafting your investment strategy around stability or growth, depending on the investment profile you feel you need as a result of your expected withdrawals.
Of course, if I can clarify any of the above please feel free to reach out.
Adam C. Harding, CFP
Disclosure: For informational purposes only. Not to be considered investment, tax, or legal advice. My responses on Nerdwallet are for educational purposes only and action should not be taken until a thorough analysis has been done by me or your financial advisor. Investing involves risk of loss and diversification does not ensure protection against risk of loss.
You can deduct up to $3k per year of investment losses. In a few years you will have minimized the loss. If you had capital gains you can realize, then you can offset up to $10k of those losses and speed up the tax minimization.
Sell some winners to offset the loss.
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