First let me share that you can use capital losses (stock losses) to offset capital gains during a taxable year. If you do not have any capital gains, then you you can use a capital loss as an offset to ordinary income, up to $3,000 per year. Quoted from publication 544 for 2021 from the IRS: “Capital losses are allowed in full against capital gains plus up to $3,000 of ordinary income .”
Let’s talk about Stock Moe’s tax less harvesting that he mentioned in his recent video. Say I have a 90K gain in capital gains like Stock Moe. If I do not offset that 90K with a loss, then I pay a short term capital gains tax that is the same % as my regular income tax. Let’s say that is 30%. That is 27,000 that I am paying in taxes UNLESS I can offset my gains with losses. So, if I offset those gains with losses, then my taxable income from stocks would be $0. I just saved myself $27,000.
Stock Moe did this with the gains that he took from some of his leveraged plays. When he sold other stocks, he sold them at a loss which means he sold them for lower than what he bought them. He can offset his capital gains with these losses. Then, he took the money from the sale of the stocks that he sold for a loss and moved it into something else. Therefore, all of his money is still invested. Now he owes $0 on his taxes at this point in the year. He usually waits until December to take some losses, but he saw this as a good opportunity since he feels that the available losses may not be as great in Q3 and Q4.
Why would he do this? If he does not offset gains, then he needs to pay that capital gains tax. That is a lot of money. Could he wait and recoup that money? Think about the amount of return that he would need on all of his other stocks in order to get all of that money back. Therefore, a smart investor is going to think ahead for the next year’s tax season. If you don’t have any losses at all, that is great! It means you made a lot of money, but it also means that you are going to pay taxes on all of those gains. If you have losses, you can use them smartly to offset the gains.
For those who think that you may only use $3,000 toward tax losses, remember this: “Capital losses are allowed in full against capital gains plus up to $3,000 of ordinary income .” If you do not have any capital gains, then you may use up to $3,000 in losses against your regular income.
This article refers to United States taxes. As always please consult an accountant for all accounting questions. This is not meant to be financial advice, but, rather, sharing why Moe is making the moves that he is. Please refer to Publication 544 from the IRS for more information or check with your country for tax laws if you do not reside in the United States.