September 9, 2020

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

When the Coronavirus pandemic first happened, the stock market took a huge hit. Within days, the stock market entered into a correction period. Despite the market recovering most of its losses, large unemployment rates still remain that haven’t been seen since the Great Depression.

Most people investing in the stock market typically don’t enjoy taking losses and want to avoid future tax problems down the road when filing their taxes.

If you are invested in the stock market or debating whether or not you want to in the near future, here is what you need to know in order to avoid tax implications.

Tax-loss harvesting

Whenever a taxpayer has capital losses, it typically means assets such as stocks and bonds lose value and can be used to offset capital gains. The term tax-loss harvesting is used by investors as a way to explain capital losses so you can use them to offset other gains.

Tax-loss harvest is a type of income tax deferral that can be used with non-tax-sheltered investments. By selling losing asset positions, a taxpayer can minimize the capital gains taxes on your winning sales.

Be cautious for the IRS’s “Wash-Sale” rule

Taxpayers need to be cautious of the wash-sale rule when utilizing tax-loss harvesting. 

A wash-sale is considered to have occurred anytime a taxpayer sells or trades securities at a loss and then within a 30 day period before or after the sale, do one of the following:

  1. Buy substantially identical securities.
  2. Acquire substantially identical securities in a fully taxable trade.
  3. Acquire a contract or option to buy substantially identical securities.

The IRS can disallow the loss on the assets sold. However, there are a few steps a taxpayer can take to ensure that their capital losses offset their gain.

Although we can’t predict what further damage could come from the Coronavirus pandemic and how it will affect the stock market for the rest of 2020, there are steps taxpayers can take to protect themselves when it comes to filing next tax season. 

If you need tax help, contact us for a free consultation.