How to Turn Your Stock or Crypto Losses into Tax Gains
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Here's your Money Briefing for Monday, June 13th. I'm J.R. Whalen for The Wall Street Journal. The past few months have been tricky for investors. With everything from stocks to bonds to cryptocurrencies falling, it's hard to know whether to weather the storm or get out. While sticking to your guns has traditionally been the answer, in some cases it might be worth it to cut your losses.
This is why it's very important to pay attention to what's going on in your portfolio, because there can be opportunities, even if you have losses, to help turn them into gains.
On today's show, tax reporter Laura Saunders will explain the process of using losses to your advantage and potentially putting money back in your pocket. That's after the break.
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If you're like a lot of investors, you've seen your stocks and mutual funds take a big hit this year.
What tax opportunity can investors use when their stocks or crypto fall?
Stock market declines can make your stomach turn, but all is not lost. Investors can sell their holdings, including cryptocurrency, at a loss and apply those losses to their benefit on next year's tax return. So how does that work? Who better than our tax reporter Laura Saunders to explain the nuts and bolts? Laura, thanks so much for being with us.
And thanks for having me.
All right, Laura, we might need a little bit of Stock Market 101 from you here. So people can sell some of their holdings at a loss. What does that loss represent?
Well, the loss is called a capital loss or a tax loss, and it's typically the difference between the holding's purchase price and its sales price. So if you buy Acme stock at $10 and it goes down to $5, then you have a capital loss of about $5 a share. then you can use these losses to offset taxes on gains from selling other holdings that have gone up. So if you have that $5 loss and you have another holding that's gone from $10 to $15 and you want to raise some cash and you sell the $15 stock, then you can use that $5 loss to offset the $5 gain on the winner.
All right. So what kinds of investments can people sell to do a tax loss?
Well, almost any kinds of investments, stocks, mutual funds, ETFs, bond funds, cryptocurrencies, real estate. The important thing here is that you can only use these rules with losses and gains if the holding is in a taxable account. If it's inside of an IRA or 401k plan, that has its other tax advantages. And so you can't do what the strategies that we're talking about here. And that's a very important point because a lot of people have money in or a lot of their assets in retirement plans.
Okay. And so when would someone have to sell an investment to get the benefit of the tax loss?
Well, you don't have to sell at any particular point during the year. When you sell, you book a loss and then that loss is good until you use it in the future. If you sell at a loss and you get the loss, it doesn't go away. It carries forward until you have some gains. And that's a really nice thing. You know, it doesn't just expire at the end of the year.
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