The S&P 500 has fallen by about 15% this year, leading many SoFi (NASDAQ:SOFI) users to wonder if the platform allows tax-loss harvesting (TLH). TLH is a strategy many investors use to offset their annual capital gains or taxable income. The strategy only works with taxable investment accounts, so any losses sustained in accounts like a Roth IRA can not be used for TLH. Prior to 2017, Roth IRA participants could deduct losses for TLH if they withdrew their funds and closed their accounts.
Losses from stocks, bonds and cryptocurrencies are all applicable for TLH. Anyone seeking to take advantage of TLH for the 2022 tax year must sell their position for a loss by Dec. 31.
Here is an example of the strategy:
- An investor invests $10,000 into Company XYZ.
- Before 2022 ends, the investment in XYZ has dropped to a value of $8,000.
- The investor sells his stake for a $2,000 loss and invests the remaining $8,000 elsewhere.
- The $2,000 loss can now be used to offset any capital gains sustained during the year. If the loss exceeds any capital gains, then it can be used to offset taxable income.
- Using a long-term capital gains tax of 15%, the investor could deduct $300 ($2,000 x 0.15) of taxes on capital gains of $2,000, or taxable income if there are no capital gains. Short-term gains can be taxed up to 37% depending on a person’s income bracket.
Users of SoFi’s regular investing accounts are eligible for TLH, as it an IRS policy and not a company-by-company policy.
NerdWallet reports that SoFi’s automated investing service does not allow TLH. SoFi itself states that it auto invest accounts do not “offer tax-loss harvesting as part of their auto-rebalancing calculations.”
Investors seeking to take advantage of TLH should also be aware of the IRS’s wash-sale rules. A wash sale occurs when an investor sells a security for a loss and buys back the same or “substantially identical” (think of all the different S&P 500 index funds offered by different companies) security within 30 days. If this happens, the IRA will not allow you to deduct the loss from your capital gains or taxable income.
Finally, anyone interested in TLH should consult a tax professional beforehand.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Eddie Pan specializes in institutional investments and insider activity. He writes for InvestorPlace’s Today’s Market team, which centers on the latest news involving popular stocks.