I'm a financial planner, and I saved on my taxes by taking advantage of the stock market's poor performance in 2022

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  • The market dropped significantly in 2022, but I was able to use my losses to save on my taxes.
  • Tax-loss harvesting can save you a significant amount on your taxes, but it requires careful planning.
  • It’s a good idea to talk to an accountant to figure out what’s best for your personal situation.

Last year was an especially volatile year for the stock market and I, like many other investors, watched as stocks lost a decent amount of their value. High inflation, Fed rate hikes, and geopolitical drama battered stocks throughout the year — over the course of 2022, the S&P 500 index lost 18% of its value, while the Nasdaq fell by just under a third.

I’m a financial planner, and always try to take a proactive approach to my finances. Once I saw how my portfolio performed at the end of the year, I decided to make some strategic decisions to adjust my portfolio for future storms and use the losses to my advantage. I decided to take action to make the best of a bad situation by pursuing tax-loss harvesting.

Tax-loss harvesting is a powerful tool that investors can use to offset capital gains taxes by selling stocks or other investments at a loss, thus reducing their overall tax burden. My taxable income in 2022 was much higher than in years’ past, and I was definitely looking for ways to reduce my overall tax burden. I decided this was an ideal strategy for me given the volatility on the market and my desire to reduce my taxable income when possible.

I planned ahead to get the most out of tax-loss harvesting

Tax-loss harvesting is helping me save money by making strategic investments. Those investments resulted in losses in my portfolio, but I could use them as a deduction from other gains.

When it comes to tax-loss harvesting, timing is key. I made sure to consider when my overall taxable income would be the highest and planned ahead for that time frame. Tax-loss harvesting can lower your current year’s tax liability. It can also reduce your liability in future years by allowing you to carry forward losses from one year to the next.

Tax-loss harvesting depends on how long you’ve held stocks

When investing in the stock market, it is inevitable that some of your investments will see losses. I used my losses to offset gains I made elsewhere and benefitted from tax savings. These losses can be used to either offset gains made from my other investments, or offset up to $3,000 of income in any given year. I can carry forward any additional unused losses into future years.

One key consideration for tax-loss harvesting is how long you’ve held onto your stocks. This is because the capital gains tax for short-term losses (on stocks you’ve held less than a year) is different than long-term losses (on stocks you’ve held longer than a year). The specific way these different losses are put towards tax-loss harvesting can get pretty complicated, so I definitely recommend talking to an accountant if you’re considering this strategy.

Why tax-loss harvesting is right for me

Tax-loss harvesting can be beneficial in some cases, but it’s important to consider all the rules and requirements before you decide if it’s right for you. I was careful to avoid violating the wash sale rule, which says that you can’t repurchase the same stock or similar security within 30 days of selling it at a loss for tax purposes. Additionally, if you sell investments at a loss and then wait more than 12 months to repurchase them, you may miss out on any potential gains in between.

I found tax-loss harvesting to be a great strategy for offsetting my capital gains taxes. With careful planning and research, I made the most of my investments and reduced my overall tax burden.