Hey everyone, and welcome to another episode of Tiffany's Take, where I answer your questions right here on the podcast. Today we're talking about something that every single person who has ever bought a stock, an ETF, or an index fund deals with and usually hates looking at. And that's the red numbers in your investment portfolio. So let's be honest, when you log into your brokerage account and see an investment down 20, 30, or 40% from what you pay for, what does your brain do? Your brain feels that little sting of embarrassment. Your ego flares up and says, I'm not selling this until it gets back to even, at least if I could break even. And you know, if I don't sell it, then it's not a real loss. We tell ourselves we're being patient, we're just not trying to time the market, we're being long-term thinkers. But half the time, if we're telling the full truth, we're just being stubborn. We hold on to an underperforming asset out of shame, hoping it'll it will magically rebound so we don't have to admit that we bought something that didn't work out. But I want you to hear me clearly holding on to a dead asset just to protect your ego is bad stewardship. Stewardship is about maintaining what is in your hands right now with clarity and intention. It's not about pretending a mistake didn't happen. Today we're going to flip the script and we're going to talk about how you can take an investment loss and turn it into a legitimate legal tax bill win before the end of the year through a strategy called tax loss harvesting. Now, the reason this came up is because I just received not too long ago an email from an accounting organization and they talked about tax loss harvesting. And I said, I wonder if my audience knows about this. So let's get into the mechanics. Now, don't let the Wall Street phrase tax loss harvesting intimidate you. It sounds complex, but the underlying mechanisms are pretty straightforward. So tax loss harvesting simply means selling an investment at a loss in order to offset taxable investment gains or to reduce your ordinary taxable income when you file your return. So let's look at how the math works in real life. So let's say you had a fantastic run this year on one of your stocks, let's take Apple, and you sold your shares and locked in a realized capital gain of let's just say $10,000. On paper, Uncle Sam expects a cut of that $10,000 profit. Now look at the rest of your portfolio. Suppose you also bought shares in a company like Lululemon that hit a rough patch, and then now that position is sitting at a $5,000 loss. If you decide to sell that losing position before the year closes, you realize a $5,000 loss. Now, when I say realize, that just means you acknowledge that it happened, okay, on paper. So that $5,000 loss offsets your $10,000 gain dollar for dollar. So that's rule number one. It's a dollar for dollar gain offset. So instead of paying capital gains taxes on $10,000, your net taxable gain drops to just $5,000. So you just protected five grand of profit from being taxed this year. Now let's talk about rule number two. What happens if your losses are bigger than your gains? So let's flip the scenario. Suppose your Lululemon loss wasn't $5,000, it was $13,000. If you sell that $13,000 loss first completely wipes out the entire $10,000 gain from Apple, your capital gains tax drops to zero. You still have $3,000 of loss left over. So under the IRS rules, you can use up to $3,000 of excess net capital losses, or $1,500 if you're married filing separately, to reduce your ordinary taxable income. So that's your W-2 salary, your $1099 earnings, your interest, or your dividends. So that's rule number two. Rule number three is the carry-forward rule. So what if your loss was even bigger? Let's say you had a total loss of $20,000. You offset your gains, you take the $3,000 ordinary income deduction for this year, and any remaining unused loss, it doesn't disappear. You can carry it forward into future tax years to offset future gains or income indefinitely until it's used up. So there's a crucial catch though. This is only for taxable brokerage accounts only. So this is where people often get tripped up. Tax loss harvesting only applies to taxable brokerage accounts. If your investments are sitting inside a traditional IRA, a Roth IRA, a 401k or a 403B, tax loss harvesting doesn't exist there. Those accounts already have special tax deferred or tax-free status. So unfortunately, you can't sweeten the deal with more tax deferred or tax-free status. So you can't deduct losses inside a retirement account. This strategy is strictly for individual or joint brokerage accounts. Now, I also want to put in here too, I'm just giving y'all information. So this is not investment or any type of advice. This is just for your entertainment educational purposes only. So now, if you're listening to this and thinking, Tiffany, that sounds great. I'll just sell my losing stock on Tuesday, capture the tax loss, and buy the exact same stock right back on Wednesday morning so I don't miss the recovery. Hold your horses. The IRS started at decades ago. So that is called the wash sale rule. And if you trigger it, you completely wash away your tax benefit. Here's how the wash sale rule works in plain English. If you sell a security at a loss and by the same or substantially identical stock, and I'm doing air quotes, or security within 30 days before or 30 days after the sale, the loss is disallowed for that tax year. So notice the math. You have 30 days before the sale, the day of the sale, and 30 days after the sale. So that's a 61-day window where you cannot purchase back that same asset. If you violate the rule, the IRS disallows the loss deduction on your current return. And instead, they add that loss to the cost basis of your new shares. Your deduction gets postponed until you eventually sell that new block of stock. You get it? So even worse, if you try to sell a stock at a loss in your taxable brokerage account and buy it right back inside of your Roth IRA, IRS Revenue Ruling 2008. So how do investors handle this properly? Because I know I said a lot. So number one, wait out the 31 days, leave the cash in a high yield cash sweep or money market inside your brokerage for a full 31 days before buying the original asset back. Number two, reinvest in a complementary, non-identical alternative. So if you sold an individual company because the industry is struggling, you can redeploy that capital into a broad sector ETF or a different player in that sector that isn't considered substantially identical, that keeps your money working in the market without tripping the wash sale wire. Now, and I know this is a lot, but I want to make sure you understand tax loss harvesting in full. So here's the final trap that people fall into every single December procrastination. So people hear year-in tax strategy and they put it off until December 30th or the 31st while they're sitting on the couch between holiday celebrations. Here is the reality of financial markets. Trade date is not the only date that matters. While the US stock market operates on a standard T plus one settlement cycle, meaning trades generally settle one business day after the trade date. So once you hit trade in your brokerage account, usually they settle in one business day. So brokers have varying cutoff times, system maintenance windows, and holiday closures around Christmas and New Year's Eve. So if you try placing trades on December 31st at 3:45 p.m., a system hiccup, an after hours queue, or broker settlement rule could push your transaction into the new year. And if that happens, your intended tax break doesn't apply to the return you file in April. It gets pushed a full year into the future. So your target window for this, don't wait for late December. The ideal time to review your taxable portfolio for tax loss harvesting is late November. That's why I'm doing this episode now, through the first week of December. That gives you ample runway to evaluate your positions, calculate your net numbers, execute your trades calmly, and respect the 30-day wash sale window before the calendar turns. So before you log into your brokerage app and start hitting sell, let me give you the responsible counselor disclaimer. Always consult with a certified public accountant or credential tax professional before pulling the trigger on tax loss sales. Also, make sure you always consult a certified public accountant or credential tax professional before pulling a trigger on tax loss sales. A CPA can review your specific tax bracket, verify whether your gains are short term or long term, and ensure this move actually benefits your total tax picture. If you don't have a CPA, organizations like the Illinois CPA Society, who sent me that email, shout out to y'all, or for directories to help you find qualified tax advisors. And remember, taxes are only one slice of the pie. Never let the tax tail wag the financial dog. Also, I want to do another disclaimer. If you have any questions about your investments, make sure that you consult with a certified financial planner or a financial advisor so they can help you make the best decision on whether you should buy or sell anything if you decide to go that route. So selling an investment just to save $200 on taxes makes no sense if that asset still aligns with your 20-year wealth strategy. Tax optimization should serve your overall life and cash flow, not the other way around. So if you're looking at your total financial picture heading into year end, your cash flow, your debt, your savings buffers, and how your money actually flows into your household, and you know you need clarity, this is what I do. As an accredited financial counselor, my one-on-one strategy intensives are designed to sit down with your real numbers, remove the shame, and build a stress-free system tailored to your life. So head on over to moneytuquity.com forward slash start to book your one-on-one session or explore resources to get your financial foundation solid before the new year arrives. So take a look at your taxable portfolio this week without shame. Ditch the ego, look at the numbers as tools, not trophies. Stewardship is about turning every situation, even a market loss, into an intentional step forward. Until next time, keep managing your money with clarity, intentionality, and peace. Have a great week. Bye.
