It’s been a rough start to 2022 from an investing perspective. While stocks happened to rally late last week, many investors are still seeing losses in their portfolios.
Now if you haven’t sold off investments since the start of the recent downturn, you may only be looking at losses on screen. But if you panicked and sold off investments in the hopes of minimizing the damage, then you may now be sitting on actual losses.
If that’s the case, there’s one silver lining. You may be able to use those losses strategically to pave the way for other gains.
Make the most of your losses
Your goal as an investor should be to make money, not lose it. But sometimes, liquidating a stock when it’s down makes sense. Or, sometimes, it’s something you do when emotions get the better of you.
Whenever you sell a stock for a price that’s less than what you paid for it, it counts as a capital loss. And you can use capital losses to offset capital gains in your portfolio.
Why is that important? You may be sitting on some stocks whose value you feel has peaked. If that’s the case, selling them could mean enjoying a huge gain — but also facing a large tax bill to follow. But if you have losses you took recently in your portfolio, you can use them to offset any capital gains you take, thereby slashing that tax bill or, depending on the situation at hand, eliminating it completely.
Now to be clear, if you have investments in your portfolio that you think still have plenty of room for growth, then now’s probably not the right time to sell. But if you’ve been itching to cash out a specific stock and the only thing holding you back has been fear of a large tax bill, then tax loss harvesting may be your ticket to acting on that strategy.
You should also know that if you took a loss in your portfolio, you can carry part of it forward to future tax years. So, say you took a $15,000 loss but want to sell a stock that will result in $10,000 of capital gains. In that case, you won’t lose your remaining $5,000 loss. Instead, you’ll simply carry it forward — though you can also use capital losses to offset up to $3,000 in ordinary income per year.
Don’t be so quick to dump investments
It’s natural to panic when you see the value of your portfolio plummet overnight, but it’s important to keep your cool to avoid locking in permanent losses. However, if that ship has sailed, and you’re now sitting on a loss in your portfolio, take comfort in the fact that you can use it to your benefit.
Not only can you use your loss to offset capital gains, but in liquidating a certain position, you may have freed up cash to buy more stocks with huge growth potential. And that’s an opportunity to pays to capitalize on — before the market recovers and stock values come back up.