Market Volatility Can Create Tax-Smart Opportunities

Although periods of market volatility can often create investor anxiety, the gains and losses incurred during up and down markets can be leveraged to work together to minimize the taxes investors pay on capital gains. Through a practice called “tax loss harvesting,” a savvy investor and wealth advisory team can strategically reduce federal tax liabilities without impacting long-term investment plans.

When you hold a security in a taxable investment account (e.g., not an IRA, Roth IRA, workplace retirement plan, or College Savings Plan), dividends, distributions, and sales can be subject to income tax. Complicating matters, each type of income may be subject to a different tax calculation.

Capital gain tax rates

Sales of investments are subject to "capital gains" taxes, and tax levels are based on how long you have held the investment. Capital gains (or losses) are the difference between the sale price of an investment and its purchase price.

  1. If the investment is sold after being held for less than one year, it is considered a "short-term capital gain"
  2. If an investment is sold after being held for one year or more, it is considered a "long-term capital gain"

Federal short-term capital gains are taxed at ordinary income tax rates; this is the tax rate you pay on your earnings (such as your salary at work) and retirement plan distributions. Long-term capital gains rates range from 0% to 20% based on your total taxable income.