Losing feels worse than winning feels good. –Vin Scully
Earlier in the week we had the joy of attending a parent teacher/conference. We were sitting with the math teacher, who gave the familiar, “ Your son is such a good boy, but…” when a message came over the loudspeaker about a certain car with license plate number blah blah that had better move their car, before the police give a ticket.
I paid little attention to the loudspeaker, choosing to try and read upside down the class test scores which were partially uncovered and see how our boy is doing vis-a-vis the rest of his class, when my wife said, “Hey that’s your car! Run quick and move it.” Being the good husband I did as told and went down to move my car which I inadvertently had parked in a way that blocked a driveway.
In my defense neither my wife nor I noticed that we were blocking anything and there was another car that pulled in the same time we did that was also blocking. After moving the car, I ran into a friend that I haven’t seen in years, and we started talking. She told me about her kids trading Crypto currencies and making a lot of money. She then said she hopes that they lose money, to teach them a lesson both of humility and the need to work hard to make money.
We are in December, and it’s almost year-end. With the surge in global equity markets, there is a good chance that you are sitting on some nice capital gains. If you were to take profits you may need to pay capital gains tax. Nonetheless, there may be a way to help lower your tax bill.
While you may have nice profits from recent trades, if you bought some post-corona high-flying technology stocks over the last 8-9 months, chances are that you may have some big losses as well. Unfortunately when I advise clients to sell unprofitable stocks in order for the loss to be used to offset other gains within the portfolio, they often refuse. Investors sometimes prefer to hold off on selling stocks that have dropped, believing instead that the stocks will eventually go back up. There may be another way to profit from a poorly performing stock.
There is a term used for selling positions at a loss in your portfolio and it is called “tax-loss selling.” It’s a process of selling securities at a loss to offset a capital-gains tax liability. Though you may not realize it, tax-loss selling may be the most important way to reduce your tax bill. If done correctly, it can save you money and help diversify your portfolio in ways that have not yet been considered. For example, let’s say you have a gain in Tesla stock and decide to sell it, you will be taxed on that gain in full. But if you have a loss in Zoom and sell the stock, the amount of the loss may offset the gain in Tesla, reducing the sum of the taxes owed. Although you may not be able to recover your entire loss, it certainly cushions the blow.
It’s customary for both professional money managers and investment advisers to wait until the end of the year to start selling their losing stocks. However, there are no hard and fast rules to this. Personally, I like to take advantage of downturns in the market, to review clients’ portfolios and advise them on taking losses. Keep in mind one of the golden rules of investing: ride your winners. Some of the most successful investment strategies call for investors to hold onto their good performing stocks and sell the laggards, because chances are there is a good reason why they are lagging. As explained above, there is an added value in selling the laggards, which is that the losses are used to offset any possible gains. Not only does this update the portfolio by holding only the good positions, but realizing the losses is also a significant benefit.
There is a rule in the United States, known as the Wash-Sale Rule, according to which the IRS disallows a loss deduction from the sale of a security if a “substantially identical security” was purchased within 30 days before or after the sale. For example, if an investor sold 100 shares of Nordstrom on December 1st and then bought back 100 shares of the same stock on December 15th, the loss deduction would not be allowed. The Wash-Sale Rule is designed to prevent investors from making trades for the sole purpose of avoiding taxes.
It’s important to speak with your accountant before implementing this tax-loss strategy. This article is simply meant to alert you to the concept of Wash-Sale rules but is certainly not a complete discussion of all the aspects of it, and it should not be considered individual tax advice.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the US and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). For more information, call (02) 624-0995 visit www.aaronkatsman.com or email [email protected]