Make Lemonade: Offsetting Gains with Losses

May 24, 2023 | Planning Playbook

Investment losses offer an opportunity to make lemonade. In this video, Kyle Barclay, Senior Vice President and Wealth Advisor at GreenUp Wealth Management explains how to offset capital gains with capital losses- a valuable strategy for investors to reduce their tax bill.

Hi, I’m Kyle Barclay, Senior Vice President and Wealth Advisor at GreenUp Wealth Management. 

We’ve all heard the old saying, “When the world gives you lemons, make lemonade.” This old adage is applicable and impactful in the recent market environment. 2022 was the worst year for the U.S. stock market since the Great Recession of 2008, and the worst year ever for bonds. Investment losses create an opportunity to make lemonade. 

Capital gains occur when you sell an asset for more than you paid for it, while capital losses occur when you sell an asset for less than you paid for it. If you have more capital gains than losses in a tax year, you will owe taxes on the difference. However, if you have more losses than gains, you can use those losses to offset your gains. So, if you bought a stock for a dollar and sold it for $10, you have a $9 capital gain. Conversely, if you bought a stock for $10 and sold it for one dollar, you have a capital loss of $9.  

Here’s a more realistic example: 

Let’s say you have $10,000 in capital losses from selling stocks in 2022 and $2,000 in capital gains for that year. You can use $2,000 of your losses to offset your gains so you won’t pay any capital gains taxes for 2022. Additionally, you can deduct $3,000 of your losses from your ordinary income, so if your income was $75,000, for example, you would pay income taxes on $72,000. After offsetting your capital gains with $2,000 of losses and offsetting your ordinary income with $3,000, you have $5,000 left of losses to carry forward to future tax years which you can use to offset future capital gains. 

Nobody wants to lose money but as you can see, there’s an opportunity to make lemonade when losses occur. This is a valuable tax strategy for investors who experience losses in one tax year, such as 2022, but have gains in future years. 

Continuing with our example, let’s say that in 2023, you sell another stock for a $7,000 gain. Normally, you’d owe taxes on the full $7,000 gain. However, because you have $5,000 in carry forward losses from the prior year, you can use those losses to offset $5,000 worth of gains, leaving you with only a taxable gain of $2,000. Naturally, the tax impact is even greater for those with large portfolios. 

Capital loss carryforwards can be a valuable tool for taxpayers after a bad year for the markets. By keeping track of your losses and accurately reporting them on your tax return, you can reduce your tax bill. Consult with your GreenUp Wealth Advisor about capital gains and losses to ensure that you’re making the most of your investment strategy and minimizing your tax liability. 

I’m Kyle Barclay. Thanks for watching! 

Author

  • Kyle Barclay, CFP®

    Senior Vice President | Wealth Advisor | Kansas City -- Kyle is a CFP® and has been in the financial services industry advocating for clients helping them reach their financial goals for over a decade. Prior to joining GreenUp Wealth Management in April of 2021, Kyle served clients as a financial advisor at a broker dealer and a registered investment advisor for 10 years. Before working in financial services, Kyle spent 8 years working in management for independent grocery stores across Missouri and Kansas always keeping a customer first mentality. As a leader in the grocery industry, he focused on enhancing each store’s customer experiences by tailoring each store’s product options, implementing new customer services, and training employees how to better understand how to best serve their customer in their respective departments.

    https://greenupwealth.com/meet-your-team/kyle-barclay/ kyle.barclay@greenupwealth.com Barclay Kyle

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