🍋 💼The High-Earner's Tax Loss Harvesting Playbook: Lemonade out of Lemons

☕Good morning. 

Welcome to Making Sense with Dan Pascone, where I decode complex tax codes into actionable intel for high-earners.

The stock market's not always sunshine and IPOs; sometimes, it's more tumble than rumble. 

When the stock market hands you lemons, you don't just make lemonade; you make premium, top-shelf lemonade that saves you money at tax time.

This week, we’re discussing how you can use tax loss harvesting to shield yourself from taxes on both short-term and long-term gains by selling off your losing holdings. 

The IRS is offering a deal: claim a deduction of up to $3,000 on your losses against what you earn from 9 to 5 (your ordinary income) in any given year and carry forward the remaining amount to future years.

Tax loss harvesting belongs in the high-earner’s financial arsenal, and knowing when to use it can make all the difference. 

Let’s say your annual salary is $250,000 (ordinary income), putting you in the 35% marginal federal income tax bracket. 

Assume you have $10,000 of investing losses you can claim. You can apply $3,000 of that sum as a deduction to this year’s ordinary income, saving you $1,050 in taxes ($3,000 * 35%). 

But, Dan, what about the remaining $7,000?

You can use it to either directly offset capital gains from any stocks you sold OR be rolled over the subsequent years indefinitely until it’s used up.

And get this—you can do this dance any time of the year, not just moments before the New Year's Eve ball drops.

There are some limitations, like the “wash sale rule” that says you can’t buy a “substantially identical” security within 30 days before or after the loss trade date. 

It’s like a cooldown period in gaming; you can’t just sell a stock, claim the loss to claim the tax benefits, and rebuy it immediately. Most of the time, this happens accidentally through trading automation or dividend re-investment. 

To better understand how tax harvesting regularly saves people thousands to millions in taxes, let’s get clear on capital gains. 

💡Capital gains are the profits from your investments when you sell them for more than you paid. 

Capital gains matter substantially for tech high-earners for three primary reasons:

💰Liquidity Events: Events like an IPO or company sale can result in significant capital gains, which, if not managed properly, can lead to a hefty tax bill.