As the fall is quickly approaching, the time is now to consider tax strategies to reduce your obligation. Although many business owners start trying to figure out their taxes around February or early April, by using the tax-loss harvesting technique months in advance, you can both reduce your tax liability and get a head start on figuring what you will owe in April!
What is Tax-Loss Harvesting?
Simply put, tax loss harvesting consists of selling investments that have experienced a loss and then applying a credit from that sale to the taxes on your other investments that have gained in value over the year.
This strategy is beneficial in two regards. It allows investors to sell investments that have underperformed, and it also allows them to use those losses to mitigate their tax liability on the investments that have done well. This is essentially selling off some investments that have diminished in value and that you no longer want to reduce your capital gains tax on the investments that have done well.
However, because many people are so intimidated by even just the words “tax season,” they often miss out on important strategies like tax-loss harvesting by putting their taxes off or neglecting to educate themselves about tax strategies.
What if I do not have any Gains to Tax-Loss Harvest?
Even if you do not have any gains that you want to offset this year, you can still use the tax-loss harvesting strategy to offset taxes applicable to your income and then “carry-over” the remainder, if any, to the next year. This strategy is not limited to a small segment of investors or security holders, but is in fact a sound and completely legal way for a large percentage of investors to reduce their tax burdens.
How to Decide which Investments to Tax-Loss Harvest
When deciding which investments to apply the tax-loss harvesting credit, keep in mind the different tax rates that apply to short-term and long-term capital gains. Short-term capital gains tax rates, which apply to investments held for less than one year, are higher than the long-term capital gains tax rate, which applies to investments held for more than one year. Therefore, although tax-loss harvesting will reduce your tax burden regardless of which type of investment (short-term or long-term) you decide use the credit on, it is most effective when applied to investments that are subject to the short-term capital gains tax.
While we still have the entire fourth quarter of 2018 left, begin to keep an eye on your investments that have so far underperformed this year and that you expect will underperform in the future. Then, begin to consider which of those investments you may want to sell in order to take advantage of tax-loss harvesting. This is a great visual representation of how tax-loss harvesting works and this is a helpful article on capital gains taxes.
As always, if we can provide any legal assistance or if you just have a question, feel free to contact the lawyers at Fourscore.
Based in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in Raleigh, Durham, Chapel Hill, Wilmington, Charlotte and throughout the Southeast. We also represent venture capital funds and other investors who invest in companies located in New York, Silicon Valley and everywhere between. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.