Indeed, 2022 was a challenging year for investors. The S&P 500 index, typically used to gauge the stock market’s performance as a whole, declined by over 18% during the period. And as a result, investors might anticipate reduced balances in their brokerage accounts.
If you experienced a loss in your brokerage account in 2022, you might be worried about achieving your financial objectives. Although capital losses are undesirable theoretically, they can be advantageous in practice.
How To Benefit From An Investment Loss
One had to sell some of the assets in his/her brokerage account in 2022 at a loss to raise money to cover the ultra-high inflation and keep credit card debt at bay. If you have gone through the scenario discussed above, you don’t necessarily have to give up on your long-term financial goals just because you had a bad year.
Additionally, a capital loss in your brokerage account may qualify you for a significant tax reduction in 2023. Investment capital losses may be used to offset investment capital profits. Also, if your capital losses exceed your earnings, you can use the surplus to offset some of your ordinary income.
Let’s assume you lost USD 5,000 in your brokerage account in 2022 due to purchasing stocks at USD 8,000 and then selling them for USD 3,000 instead. If you also had USD 5,000 in gains the previous year, your USD 5,000 loss will balance out your payments, resulting in no tax due to the IRS on your profits.
But let’s face it; the stock market situation meant that many investors had few gains to take in 2022. Let’s imagine you only have USD 2,000 in winnings and are holding a USD 5,000 loss. You can then deduct USD 3,000 of ordinary income from the remaining USD 3,000 loss.
To be clear, you can only deduct up to USD 3,000 in ordinary income from capital losses in a given year. So let’s imagine you have a USD 5,000 loss and no capital gains whatsoever in our case. So you would carry the remaining portion of your capital loss into the subsequent tax year after taking your USD 3,000 ordinary income loss.
Only Actual Losses May Be Claimed
Although you can use a capital loss in your brokerage account as a tax write-off, you must have disposed of investments to qualify for that tax break. You cannot claim a tax deduction for what can only be considered a hypothetical loss if the value of your portfolio dropped from USD 8,000 to USD 3,000, but you didn’t sell any assets at a loss.
Consult a tax expert to get clarification on capital loss regulations. They can help you through the subtleties and ensure you get the most significant tax benefit.