24 Feb How can I lower my tax bill on a winning investment?

Q. I have a taxable target retirement account at Vanguard. I received my 1099 with a substantial capital gain, which I didn’t receive, but it was reinvested. Now one month later, all my capital gains and quite a bit more has vanished from my net worth. Is there a way to minimize the tax?
— Taxed enough

A. We’re sorry to hear that your account has taken a hit and that you’re still stuck with a tax bill.

It sure is frustrating when you pay capital gains tax in 2021 and then your reinvested gain decreases in value the next year.

Unfortunately, there is no way to minimize your taxes in 2021 based on this set of circumstances, said Gail Rosen, a Martinsville-based certified public accountant.

But, she said, in 2022, you can sell the stock and take this capital loss on your tax return.

“The maximum net capital tax loss you can take in any tax year is $3,000,” she said. “Any capital losses in excess of $3,000 can be carried over to future years.”

But it’s also important to realize that what you have right now in 2022 is an unrealized loss.

“Unrealized losses are on paper only and not a reportable tax transaction,” she said. “If you want to take this capital loss on your tax return, you would have to sell the investment. The transaction then changes from an unrealized loss to a realized loss that is reportable on your tax return.”

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This story was originally published on Feb. 24, 2022.

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