If your investments have experienced substantial fluctuations throughout this year, you might have already witnessed notable gains and losses. However, the tax implications remain uncertain until year end when the outcomes of your trades will reveal your tax situation for 2023. Here’s essential information to help you avoid unexpected tax surprises.

Tax-Favored Retirement Accounts & Taxable Accounts

If you’ve had wild swings in the value of investments held in a tax-favored 401(k), traditional IRA, Roth IRA, or self-employed SEP account, there’s no current tax impact. While these changes affect your account value, they have no tax consequences until you finally start taking withdrawals. At that point, the size of your balance(s) will affect your tax bills. If you have investments in a Roth IRA, qualified withdrawals taken after age 59½ can be federal-income-tax-free.

With taxable accounts, your cumulative gains and losses from executed trades during the year are what matter. Unrealized gains and losses don’t affect your tax bill.

Overall Loss For 2023

If your losses for the year exceed your gains, you have a net capital loss. To determine and apply the loss:

1. Divide your gains and losses into short-term gains and losses from investments held for one year or less and long-term gains and losses from investments held for more than one year.
   • If your short-term losses exceed your short- and long-term gains, you have a net short-term capital loss for the year.
   • If your long-term losses exceed the total of your long- and short-term gains, you have a net long-term capital loss for the year.
2. Claim your allowable net capital loss deduction of up $3,000 ($1,500 if you use married filing separate status).
3. Carry over any remaining net short-term or long-term capital loss to next year where it can be used to offset capital gains in 2024 and beyond.

Overall Gain For 2023

If your gains for the year exceed your losses, you have a net capital gain. To figure out the gain:

• Divide your gains and losses into short-term gains and losses from investments held for one year or less and long-term gains and losses from investments held for more than one year.
  • If your short-term gains exceed the total of your short- and long-term losses, you have a net short-term capital gain for the year.
  • If your long-term gains exceed the total of your long- and short-term losses, you have a net long-term capital gain for the year.

   

Net Short-Term & Long-Term Gain

A net short-term capital gain is taxed at your regular federal income tax rate, which can be up to 37%. You also may owe the 3.8% net investment income tax (NIIT) (see below) and state income tax, too.

A net long-term capital gain (LTCG) is taxed at the lower federal capital gain tax rates of 0%, 15%, and 20%. Most individuals pay 15%. High-income folks will owe the maximum 20% rate on the lesser of: 1) net LTCG or 2) the excess of taxable income, including any net LTCG, over the applicable threshold. For 2023, the thresholds are $553,850 for married joint-filers, $492,300 for singles, and $523,050 for heads of households. You also may owe the NIIT and state income tax, too.

Watch Out For The NIIT

The 3.8% NIIT hits the lesser of your net investment income, including capital gains, or the amount by which your modified adjusted gross income exceeds the applicable threshold. The thresholds are:

• $250,000 for married joint-filers
• $200,000 for singles and heads of households
• $125,000 for married individuals filing separate

Year End Is Still Months Away

As explained earlier, your tax results for 2023 are up in the air until all the gains and losses from trades executed during the year are tallied up. If you have questions or want more information, consult with us.