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If you want to save money on taxes<\/a>, you’re probably already familiar with popular tax-advantaged accounts like 401(k)s, IRAs and health savings accounts (HSAs). However, if you’re also investing in taxable<\/a> brokerage accounts, you need to know how to navigate taxes related to capital gains.<\/p>\n Capital gains taxes are levied on the sales of assets, which might include items like art, jewelry, real estate, digital products or stocks<\/a>. Short-term capital gains<\/a>, incurred by assets held for less than a year, are taxed as ordinary income based on your tax bracket; long-term capital gains are taxed at 0%, 15% or 20%, in line with graduated income thresholds.<\/p>\n A strategy known as tax loss harvesting<\/a>, or using losses to offset capital gains taxes on investments sold for a profit, can help mitigate those costs \u2014 but it’s not always simple.<\/p>\n Related: Innovative Strategy for Diversifying Concentrated Positions Without Heavy Tax Burden<\/a><\/b><\/p>\n That was a problem that Mo Al Adham, the first advisor at Instacart and founder of Twitter-connected social video network Twitvid, wanted to solve. Tax loss harvesting can be “extremely hard” to do yourself, with frustrating spreadsheets and mistakes par for the course, Al Adham tells Entrepreneur<\/i>.<\/p>\n So, in 2021, Al Adham founded Frec<\/a>, a fintech company offering automated, self-service investment products that “simplify sophisticated tax strategies traditionally available through wealth managers.” The company, which is backed by Greylock and counts industry leaders from Google and Meta among its angel investors, launched its initial product in 2023.<\/p>\n Frec offers an alternative, algorithm-driven product that puts money into what it refers to as a “direct index,” essentially “decomposing” an ETF into its individual stocks to prepare for tax<\/a> loss harvesting, Al Adham says.<\/p>\n “We break it up into individual stocks, and we buy those stocks for the customers,” Al Adham explains. “Then we can generate tax losses by trading these stocks. You’re still getting the same performance as the ETF, essentially, with a tiny tracking error. But you’re getting these capital losses<\/a>, and these capital losses you can use [to save on taxes].”<\/p>\n Related: Have You Made These Year-End Tax Moves? Here’s How to Keep More of Your Money<\/a><\/b><\/p>\n Frec’s product requires a minimum investment of $20,000 \u2014 the necessary amount to buy “tiny pieces of each stock,” Al Adham notes \u2014 but the average portfolio Frec manages is about $200,000. It’s also bundled its direct index product with other complementary offerings, like the ability to borrow against your stock portfolio<\/a>.<\/p>\n “Let’s say you have been saving up in the format of stocks, you’ve been buying indices and now is the right time to renovate your bathroom,” Al Adham says. “Instead of selling your stocks to renovate your bathroom, [you could] take a loan against [your] stock to do that, and this is another tax deferral strategy<\/a> because you’re basically delaying selling your stocks to later when they’ve appreciated even more. And there’s no taxes on taking a loan out to renovate your bathroom.”<\/p>\n Al Adham also highlights that capital losses never expire in your lifetime, which means you can carry them forward to save in the future.<\/p>\n Al Adham uses the example of someone who invests $100,000 in a direct index and realizes $15,000 in losses. The next year, that person sees $15,000 in capital gains, and the previous loss offsets the new gains. However, even if that person doesn’t sell assets for a profit the following year, they can still leverage the losses to save on income taxes<\/a> \u2014 up to $3,000. In other words, someone earning $150,000 a year will pay taxes on $147,000.<\/p>\n