How to handle investments that have dropped… anyone else in this situation?

General
1

A few years back, I jumped into the stock market and made some not-so-great choices (like going for ARK). Since then, I’ve grabbed a few random stocks, but honestly, they stress me out compared to ETFs. When prices were sky-high recently, I sold a couple, making around $1000 in profit—not bad!

I just learned about tax loss harvesting (thanks to this forum!) and want to see if I’ve got this right:

If I sell the stocks that are currently down, the losses will total about $500. From what I understand, this $500 could help offset the taxes on my gains. But I don’t make a lot, so I’d probably pay either 0% or 15% on those gains (let’s say 15%, which would be $150 tax on the $1000 profit). That leaves $350 of loss.

So, do I just accept that $350 loss and promise myself to invest smarter from now on, or can I use it against other income that’s taxed?

2

You can actually use those losses to offset your regular income, up to $3000 a year. So that leftover $350 will reduce your taxable income this year. If your losses exceed $3000, they carry over to future years.

Just don’t forget—you can’t buy the same stocks within 30 days if you want to claim that loss (the wash sale rule).

Consider moving towards broad index funds in the future; way less stressful than trying to pick individual stocks!

3

@Del
Hold on, your total loss will first go toward lowering your gains. So there’s no carryover in your example. I assume your stocks were short-term (less than a year). Just so it’s clear, if your losses are higher than your gains, they carry over to the next year. Up to $3,000 in losses can be applied to your regular income. And remember, don’t buy back the same stock within 31 days. Your broker’s 1099 form will have the details.

4

@Del
Can someone break down how the wash sale rule really works?

And what if you buy options instead?

5

Parker said:
@Del
Can someone break down how the wash sale rule really works?

And what if you buy options instead?

If you sell at a loss, you can’t rebuy the same stock within 30 days before or after the sale, or you lose the ability to claim that loss.

For example:

  1. You bought a stock, it went down, and you want to sell. You need to wait 31 days to claim the loss.
  2. You’ve held a stock for 6 months, it drops below what you paid, and you sell at a loss. If you repurchase within 30 days, you can’t claim that loss.

Your 1099 from the broker will show all of this.

6

@Del
This makes me feel a bit more confident, thanks!

7

@Del
The wash sale rule means no claiming a loss if you buy the same stock 30 days before or after the sale.

8

Cash out what you can and move it to better funds. The tax hit is probably minor.

9

Rory said:
Cash out what you can and move it to better funds. The tax hit is probably minor.

Yeah, you’re probably right. But is the basic math for tax loss harvesting correct? If the numbers were bigger and the tax impact more noticeable?

10

@Bailey
Yep, that’s accurate. I do tax loss harvesting each year and target a $3000 loss to reduce my taxable income.

11

You can write off up to $3,000 in losses against your income. Any loss over that carries forward to the next year.

12

I think I’m right but short-term losses offset short-term gains, and long-term losses offset long-term gains. Keep that in mind when doing tax loss harvesting. Anyone want to check me on that?

13

Bowie said:
I think I’m right but short-term losses offset short-term gains, and long-term losses offset long-term gains. Keep that in mind when doing tax loss harvesting. Anyone want to check me on that?

You got it. Losses are first matched with the same type of gains. Short-term losses go against short-term gains, long-term against long-term. If there are leftover losses, they can offset the other type. (Source: TurboTax)

14

If you have $1000 in gains and $500 in losses, your net gain is $500. But if your income is low enough, you might not pay taxes on either $500 or $1000 of gains. And if you have a $500 loss with no gains, you might be able to write it off against your taxable income.

15

Sell and use the loss to cut your taxes. Then put that money into something with more growth potential.

16

If it were me, I’d dollar cost average and wait for a better price. And, well… hope for the best.

17

Why was my original post removed? Was it off-topic or what?

18

Ember said:
Why was my original post removed? Was it off-topic or what?

Why do these new accounts write like this? They’re always a few days old and have no karma. Are these bots? What’s going on here?

19

I guess my post disappeared. Not sure why though.

20

Ember said:
I guess my post disappeared. Not sure why though.

Haha, yeah, same here.