Are you looking at capital gains this tax year? Property such as real estate, crypto or stocks went up in value and you cashed in. That’s likely a good financial move but what do you do now to offset the taxes?
One strategy is to look for losses. The tax rules regarding losses are
Small Business Stock Loss Write-off
In the case of qualifying small business stock, losses can mean more than just an offset to capital gains.
In general, a capital loss can only be used to the extent that it offsets capital gains plus $3,000. That means if you have a loss of $60,000 on a capital asset and don’t have any capital gains, it can take you 20 years to use up that loss!
The exception is small business stock that has been capitalized with $1 million or less. This is also known as Section 1244 stock. In the case of this kind of loss, up to $50,000 of small business stock loss can be fully deducted as an ordinary loss. It’s not subject to the $3,000 cap. If you’re a married couple, filing jointly, you can deduct up to $100,000
There is a catch though. The small business must be an active business. If 50% of more of the income in the five years prior came from passive sources like rent, dividends, royalties or others, you can’t get the same break.
A recent court case (Ushio) affirmed the IRS’s position. The company must be an operating company in order for you to take the Section 1244 treatment.
Real Estate Property Losses
If you have rental real estate, it’s a bit of a hybrid when you sell. The gains are considered capital gains and the losses are considered ordinary losses. The best of both worlds!
However, if the property has not been put in service and is instead simply treated as an investment, you may have capital loss limitation on the sale if there is a loss.
If you sell stock at a loss, it is considered either a short term capital loss or a long term capital loss. It doesn’t matter as much which one when it is a loss, but it does matter when there is a gain.
If you sell stock that has gone down in value and then buy it back within 30 days, it’s considered a “wash”. That means you can’t deduct the loss on your tax return.
Wash rules stop taxpayers from tax harvesting losses on stock sales.
If your cryptocurrency goes down in value and you sell it, it is a capital loss, much like a stock sale. However, if you sell the cryptocurrency and immediately buy back the position, wash sale rules do not apply.
This can be a strategy when you have capital gains to offset. Do you have any capital losses that you can harvest from crypto? Sell and buy back the position. Your basis will be lower, but you’ll have losses you can offset. Of course, tax harvesting doesn’t make as much sense if you don’t have capital gains to offset. In that case, you’re likely better off just waiting for the crypto value to recover.
Besides these strategies for capital losses, there are also strategies for writing off suspended and carryforward losses from businesses, investments and deductions that have been phased out.
Make sure your tax professional is aware of the potential write offs by getting copies of all past tax filings that they may not currently have. When you switch professionals, this sometimes get forgotten and your loss can really mean a financial loss.
Got a question about tax losses and how to use them to your benefit? Here are some ways to get your tax questions answered Tax Questions Answered