January 5th, 2017 at 6:19:37 PM permalink
In the U.S., if you have a stock or mutual fund that has lost ground you can sell it at a loss and claim up to a $3,000 capital loss for any one year. For a middle class person with an average income this would probably work out to be about a $1,000 net gain depending on how it effects your state tax. State tax laws are not uniform throughout the U.S. But what if you didn't want to sell the stock or mutual fund because you thought it was still a good investment and was likely to rebound? You might think of selling it and then buying it right back. But you can't. You are subject to the IRS's "wash rule" which prohibits you from doing this within 30 days before or after this sale. However, there are a few different things you could do. You could buy it right back right after the 30 day period in which case you would lose out if the stock or mutual fund went up, and win out if the stock or mutual fund went down during this period. If the security stays at about the same level you really have won because the wash rule did not hurt you. Or you could double up just before 30 days before you sell in which case you would gain if the security goes up and lose if the security goes down (compared to doing nothing.) Again, if it remains at about the same level you will have won, because the wash rule has not hindered your postition. However, I think the best way to do this, which is what I have done, is to buy a very similar security as soon as you make the tax advantageous sale. You could probably find one that is very similar. Then after the 30 day period you could sell the similar one and buy back the original security. If you do this it is not likely to effect your position significantly. The IRS only forbids you to do this with stocks or securities that are "substantially identical." Stocks or securities issued by one corporation are not considered substantially identical to stocks or securities of another. Unfortunately, it's too late for your 2016 return to do this (unless there is some law that I'm not aware of that would allow you to sell in 2017 and claim the loss for 2016 but I don't think there is.) So, if this works for you enjoy your extra $1,000.
Last edited by: lilredrooster on Jan 5, 2017
Please don't feed the trolls
January 5th, 2017 at 10:33:40 PM permalink
Tax loss harvesting is awesome. You can do it manually, but services like Wealthfront or Betterment do it automatically - and potentially every day if the market moves the right way.
"In my own case, when it seemed to me after a long illness that death was close at hand, I found no little solace in playing constantly at dice." -- Girolamo Cardano, 1563
January 6th, 2017 at 7:43:24 AM permalink
Also, if part of the reason you are investing is to pass something down to your heirs, which for many is at least one of the reasons for investing, if your strategy is buy and hold you can see to it that a capital gains tax is never assessed against your account. The exception to this is for a mutual fund because their trading activity may generate some yearly capital gains but for the vast majority of funds these yearly capital gains are negligible. When the legator passes the account to his heirs, his heirs are shielded from having to pay a capital gains tax because of an IRS stipulation that accountants call "step up basis." Of course, they may have to pay an inheritance tax depending on the state where they live or where you live and the amount but for the Feds and in many states the exemption threshold is very high. So, in this situation, this would mean that no capital gains tax (or only a very tiny yearly one if it was a mutual fund) ever had to be paid on this account even though it may have experienced tremendous appreciation.
Last edited by: lilredrooster on Jan 6, 2017
Please don't feed the trolls