Is There a Tax Break Hiding in Your Brokerage Account?

With the IRS filing deadline coming up, a lot of people have taxes on the brain this month. And if you're not happy with the outcome of your return -- say, because you found out you owe the IRS a pile of money for 2023 -- then you may be eager to do what you can to reap more tax savings in 2024.

But one thing you may want to do is turn to your brokerage account. There may be a hidden tax break available to you.

Do you have an opportunity to lower your taxes?

There are no tax breaks to be had by contributing money to a brokerage account. Similarly, you'll pay capital gains taxes on brokerage account profits year after year. Rather, the tax break you might be able to eke out of your brokerage account could come in the form of a bum investment.

Sometimes, even the most seasoned investors pick assets that don't end up working out. So if you have a stock or asset in your brokerage account that's been consistently losing value and is down right now, you have a choice. You could leave that asset in your portfolio and hope for the best. Or, you could sell it at a loss and use that loss to better your tax situation.

Capital losses (like selling a stock for less than what you paid for it) can be used to offset capital gains. Let's say you sold a stock in your brokerage account last month at a $4,000 profit, but you have a stock whose value is down $4,000 from when you first bought it. If you sell off that stock, you'll cancel out that gain, letting you avoid paying the IRS taxes on that $4,000.

You should also know that if you don't have capital gains to cancel out, the IRS will let you use up to $3,000 in capital losses per tax year to offset ordinary income. Let's say you got a $3,000 raise at the start of 2024, only you didn't adjust your withholding to have more tax taken out of your paychecks. What may happen is that you end up owing the IRS money again in 2025.

However, if you're sitting on a $4,000 loss in your brokerage account, you can use $3,000 of that to offset your raise. You can then even carry your remaining $1,000 loss to the following tax year and use it to your advantage then.

A strategic tax move that could work out

Clearly, your goal in assembling an investment portfolio isn't to lose money on the assets you own -- it's to make money. But if you happen to have a stock or asset that just hasn't panned out, you should know that making that loss official could work to your benefit from a tax perspective.

In fact, even if you have certain stocks in your portfolio that are down but likely to recover, you might still consider selling some if you have a lot of capital gains to offset. A good idea in this regard, though, is to consult a financial advisor or tax professional so they can guide you through the process and help you understand the rules. That way, you won't accidentally make a move that doesn't achieve its intended purpose.