The Boost: Use loss carryforwards to save on taxes

Are you riding high after the stock market’s 24% rise in 2023? It’s great to see a $100K portfolio grow to $124K or a $1,000,000 portfolio to $1,240,000. You can now see those gains compound into more gains for years to come.

After a great year, don’t lose sight of the long-term picture and opportunities to compound your wealth further. While 2023 returns were fantastic, 2022 was awful. Today we dive into a quirky way to turn 2022 losses in your taxable brokerage accounts into potential gains.

🧠 What you need to know

Individuals can deduct stock losses in taxable accounts to offset capital gains and maximize the ordinary income deduction under the US tax code. Excess losses can be carried forward to future years as a “loss carryforward.”

Warning: An example that may hit close to home:

You bought 100 shares of Tesla at $329 in March 2022. You sold it later in the year at $109 because you were nervous about the overall market, worried about Elon’s X-capades, had doubts about Tesla’s future, or you wanted to use losses to reduce your taxes.

March ‘22: Bought $32,900

December ‘22: Sold $10,900

Total Tesla loss: $22,000

Let’s say you also realized $10,000 of gains on Apple. Netted against the $22,000 loss, you have $12,000 in net losses. You can only take $3,000 of net losses against your ordinary income, leaving you with $9,000 in net losses to carry forward.

Apple Gain: $10,000

Tesla Loss: $22,000

Net Loss: $12,000

Ordinary income deduction: $3,000

Loss carry forward $9,000

Note: In this example, the $9,000 would be a short-term loss carry forward because you held Tesla for less than one year. To use the loss, you’d first need to net it against any short-term gains before using it against long-term gains. However, if you don’t have any short-term gains, then you can immediately use it against long-term ones.

Fast forward to 2024. With the market near all-time highs, you may decide to take some profits and realize gains. Do you know if you have a loss carryforward to offset those gains?

If you don’t want to use it or need to use it, you can carry the loss forward to future years indefinitely until you do need it. If you don’t know if you have a loss carryforward, ask your accountant or find it in Schedule D of your tax return.

🤝 How can Mezzi help?

Mezzi already helps you reduce your capital gains tax and maximize your ordinary income deduction with tax-loss harvesting. We are adding the ability to:

  • Track short and long-term loss carryforwards
  • Suggestions on how to use loss carryforwards.
  • Ask your accountant to enter the data directly into Mezzi.