deciding whether to tax-loss harvest

[figner]

I've been waffling about whether to sell an individual small-cap stock for tax-loss purposes. This isn't a large fraction of my portfolio, but I'm not all that accustomed to harvesting losses so I figure this may be a good exercise for some larger holdings down the line.

To put it in perspective of my asset allocation, some of my small cap allocation is held in a dozen individual stocks (some my own picks, some from a newsletter), while the rest of the allocation is part of the Total Stock Market index fund. Because I have limited room in tax-deferred accounts, this is all taxable. I try to buy-and-hold the individual stocks so as to minimize turnover and taxes.

This stock has been kind of volatile lately (common to bounce up or down by 5-8% in a day), and currently has a loss of 25%. If I sell with the intention of buying back after 30 days, I'm unsure whether a possibly higher price will negate all the savings from the tax loss. Or, I could sell and immediately purchase another individual small-cap, or purchase an index fund (probably Europe or Pacific, as these are most out of line with my intended asset allocation). I'm not keen on the idea of buying a small-cap index fund in my taxable account, due to the turnover tax costs.

Finally, my tax bracket is 28% federal, 9% state (CA). Though this would be a long-term capital loss, I anticipate no capital gains this year so I think I could deduct the entire loss against income.

Any input is appreciated - thanks in advance!

 

[terminator]

If I sell with the intention of buying back after 30 days, I'm unsure whether a possibly higher price will negate all the savings from the tax loss.

Or you could double-down now and sell half in 31 days. It doubles your short-term potential exposure, but covers your upside scenario.

 

[DangerMouse]

We did do some selling to generate tax losses to cover some gains made earlier in the year.

 

[clifp]

FWIW, I tend to wait until after Thanksgiving to do any harvesting, since I have a clearer picture of my taxes.

I am pretty ruthless about cleaning out any short-term losers by the end of the year. Long-term holding where the tax benefit isn't as important I may hold on. I look as tax harvesting as having a double benefit.

First you get a subsidy by Uncle Sam and your state for your mistake. Secondly, when I don't own something, I am much more cautious about buying, I think it is a good way of re-evaluting your portfolio with a fresh perspective.That being said if I still like the stock 30+ later I don't hestitate to buy it back.

 

[LOL!]

I am pretty ruthless about cleaning out any short-term losers by the end of the year. Long-term holding where the tax benefit isn't as important I may hold on. I look as tax harvesting as having a double benefit.

Ditto. To add to the ruthlessness, I look at every position before it goes long term, that is 48 to 50 weeks after it was purchased. If that position has a loss, I tax loss harvest by selling it. I buy something else with the proceeds.

When I read that you had a 25% loss in a long term position, I was thinking "loss aversion trap". Get out of it by using unemotional rules such as those proposed here.

 

[twaddle]

Why wait for the 30-day wash period? I harvest the tax loss and then immediately buy a similar security (assuming I want to maintain my allocation).

There are so many ETF's these days that are virtual clones, this seems like a no-brainer.

 

[SecondCor521]

[Emphasis mine in the quote below.]

Finally, my tax bracket is 28% federal, 9% state (CA). Though this would be a long-term capital loss, I anticipate no capital gains this year so I think I could deduct the entire loss against income.

Any input is appreciated - thanks in advance!

Just a note that last time I checked, you would be limited to writing off a loss of $3,000 against regular income on your federal return. Any loss beyond that would be carried over to future years. I don't know the rules for CA returns. So if your position is large, then you would want to take into consideration that you would not receive the tax benefit right away. Also, if you did have a carryover loss, it would first be used against any gains you realize next year before going against ordinary income. For this reason I personally try to only realize losses when I have no capital gains. But I am a LTBH type and so this is not hard to do.

2Cor521

 

[kramer]

You should always harvest as much as possible, even much higher than the $3000 limit. There is no reason to wait until a certain time of the year.

In fact, you don't even want to match your losses with your gains -- better to have losses in a year without gains so that you can deduct against ordinary income.

Reasons to wait are transaction costs -- brokerage, bid/ask and market risk -- you are possibly out of the market for some period of time. A mutual fund must also consider market impact costs but this does not generally apply at the individual level.

In your situation, I would just sell and buy another similar security immediately, or even right before you sell the other, if that makes you more comfortable.

I am doing a little tax loss harvesting for my mother -- she only recently started investing in equities. I just sold Vanguard's Total Stock Market ETF and immediately bought their Large Cap ETF. Tomorrow I plan to sell her Vanguard Small Cap Value and immediately buy Ishares small cap value which tracks a completely different index.

Tax loss harvesting is one of the few (only?) free lunches in investing. It was a huge benefit for me during my accumulation years.

Kramer

 

[chinaco]

I do not own or manage individual stocks in my portfolio anymore.

My Opinion. I would not worry about taxes so much (although certain tax related selling could be a reasonable move). It tends to imply one is going to take profits somewhere else. Instead, I would be concerned about capital preservation. When I did own stocks, most were high quality issues and I had more of a buy/hold approach. If I were engaged in more active trading (using some system like CANSLIM)... I would have a manual stop limit calculated (not automatic market stop) and I would sell the holding if it dropped below that amount. It takes the emotion out of it. You will get whipsawed sometimes... But I believe it is safer.

The problem with active trading is that one needs to be able to read the tea leaves. It is a timing approach that requires access to the right information, a lot of savvy (broad knowledge) about interpreting the informations, and some luck. One can make the correct move at the wrong time and wind up 100% wrong. Most individual investors tend to rely on popular press articles for the knowledge and information. Without a solid system, one is left only with their emotions to guide them. I have not been successful at active trading. Mainly because I lack the self-discipline to stay on top of it.

One final comment: I am not talking about day trading... Which I believe to be totally insane for all but a few professionals. And the word professionals does not include the fools who decide to quit their job and gamble away their life savings.

 

[figner]

Thanks - I sold it today for a 30% loss, which will still be under $3000 in losses for the year. With the proceeds I bought a fund for the most out-of-line part of my asset allocation. Of course, after I sold, the stock went up about 5% today.

I'll be looking to repurchase in 31 days if the price is still reasonable.

 

[Mach]

I suggest that everyone learn about tax-loss "harvesting" , and make the choice for themselves.

Taking the opinion of "not worry about it", before you know what it is you're not worrying about, or before you have seen how it impacts your life, would be be unreasonable. I think each individual investors can make the decision about whether or not it's worth it for them, to take the time to reduce their tax loss each year if the option to do so is available.

I also think given the current market it's an EXCELLENT time for people to consider it. I'm glad to see this thread, thanks OP and company.

-Mach

 

[jIMOh]

if you have a loser, sell it.

If you would sell to only buy same stock back, save yourself the expense and hold.

 

[LOL!]

For those who say they are buy-and-hold and never realize capital gains, so they don't need to do tax-loss harvesting beyond the $3000 a year ... Let me ask you this:
Do you receive any capital gains distributions from your mutual funds towards the end of the year? Are some short-term and taxed at your marginal income tax rate? Do you have any positive income showing up on Schedule D?

For me the beauty of tax-loss harvesting is replacing a 33% tax rate with an 15% tax rate. The 18% difference is a very compelling reason to always tax-loss harvest. Another compelling reason is to avoid the behavioral finance trap of loss aversion.