The idea behind the Opportunity Zone program is that individuals and entities are encouraged to direct their capital gains from the sale of capital assets toward a Qualified Opportunity Fund (QOF). In return, the individuals and entities can receive certain tax benefits. One benefit involves the possible deferral of capital gains taxes.
But can investment in a Qualified Opportunity Zone (QOZ) offset short-term capital gains? The answer is no.
If an investor sells a capital asset for more than what they paid for it, this generates a capital gain. The IRS divides capital gains into two parts:
A short-term capital gain occurs when the asset is held for one year or less. This capital gain is taxed as ordinary income and is based on the investor’s tax bracket. The top income tax bracket is 37%.
A long-term capital gain occurs when the asset is held for longer than one year. This capital gain is taxed at the capital gains rate. This is also based on the investor’s tax bracket. But most investors will likely be taxed at 15%.
Furthermore, investors can use that capital gain to invest in a QOF, with the potential to defer taxes on that gain.
It’s possible to funnel either short-term or long-term capital gains into a QOF. This is, after all, part of the reason why the program was launched. But offsetting a short-term capital gain is a different story. Specifically, the only tool that can be used to offset a short-term capital gain is a short-term capital loss. A short-term capital loss occurs:
Once the investor uses a short-term capital loss against a short-term capital gain, only then can they potentially use any long-term capital loss against that short-term gain.
But again, there are a couple of caveats:
In other words, short-term losses against short-term gains. And long-term losses against long-term gains. Once these have been matched, it’s possible to match short-term losses against long-term gains and vice versa. This is a strategy known as tax loss harvesting. But it has nothing to do with QOF investments.
Again, the Opportunity Zone program was set up to help funnel the trillions of dollars of capital gains into urban revitalization efforts. As such, while it’s possible to invest short-term or long-term capital gains into a Qualified Opportunity Fund and benefit from potential tax deferrals on that amount, the program has nothing to do with offsetting capital gains.
Additionally, investing in QOFs requires research and due diligence. As such, it’s important to check with a qualified tax professional or financial planner before making such a move.