My understanding of tax loss harvesting - let’s say that I have a gain of $20,000 on one stock and a loss of $1,000 on another stock. Now I only have to pay taxes on $19,000. If my tax rate is 20%, I save having to pay $200 in taxes. Yet I’ve still lost $800 in real money.
Am I missing something? My advisor is saying tax losses are good.
If the loser stock is one that you feel will not rebound from the loss position then harvesting the loss may be good. You can rebuy the losing stock after 30 days (wash sale rule) if you want to stay in the stock.
I think the implication is that you’ve given up on the stock and want to unload it. Or you think you can buy it again cheaper next year after the wash sale period ends.
Of course spending $1,000 on an investment that you know or believe will end up being $0 is not a smart play. But no one can predict how things shake out so in the event you do happen to have a loss, that loss can help offset some taxes by reducing other capital gains or taxable income.
But again, the goal is not to spend $1,000 to save $200. That’s just silly.
You are thinking about this the wrong way.
The way you seem to be thinking about it is:
You have a set of unrealized gains at the end of the year. You sell both gain stock and loss stocks. The loss stocks offset some of the gain, but ultimately you pay more in tax than if you had not sold anything.
The correct way to think about it:
You have some random trading throughout the year. Sometimes July is a good time to sell, or you needed some money to go on a trip. This happens normally, but it will undoubtedly create some gain or loss. The tax planning comes AFTER you figure out those non-tax trades.
If you end up with an overall gain (assume your $20,000), you would normally pay $4,000 in taxes at 20%. Remember, this is tax on trades that you already did back in January or July or October. It is already built in. In this case, selling a stock you might not have otherwise sold to recognize a $1,000 loss will save you $200 of real money.
If you end up with an overall loss (let’s assume again $20,000), you would normally only be able to take a $3,000 loss against your other income and $17,000 would carry over to the future. In this situation, you could sell some gain stocks (and immediately rebuy them) to use up that capital loss. In this situation, the planning is a little harder, because you want to sell things that are short-term (so that the loss offsets ordinary income rather than capital gain income), and you probably want only to sell about $14,000 of gain so that you can still take the $3,000 loss against your wages or other income.
In BOTH cases, you start with some given amount of gain or loss that will affect your taxes regardless of what you do. The tax planning sales then just adjust from that baseline.
Tax losses are losses. BioAdvisors and RoboAdvisors both underperform VOO. Some of their marketing material won’t even show you how they compare to S&P 500 because it’s embarrassing. Just buy VOO and tell your advisor they’re FIRED.
Not stupid, this is how tax savings work. They save on the tax only. When you see businesses “writing off” vehicles, they don’t get a free vehicle. They just don’t have to pay income tax on the amount the car was worth, 20–30% savings.
A lot of times when you tax harvest you may choose to buy the stock back in 30 days (to avoid wash rule). The loss then becomes a $200 tax savings and if the stock price remains flat you get the same number of shares back.
Tax losses are good only when there is an expectation that the stock is not coming back. You’re better to take your $1,000 loss today than hold on to it and eventually take a $5,000 a few years from now.
Also keep in mind that some advisors like the idea of getting out of bad stocks in a good year because you take a small hit today but it gets the dogs out of the portfolio. This means when you look at average growth over the years it is somewhat inflated because you’ve skimmed the crap out. If you had 2 stocks, one made 10% and one lost 10%, your effective gain is 0%. But if you exit out of the bad one, your cost basis now only reflects the first stock so you are showing a 10% gain. Over time advisors will generally, quietly, get you out of bad things to make the long term outlook better.
In good years, get out of bad stuff. 2024 is looking like a good year, in balance so it is a good time to consider getting clear of things, partially to reduce tax exposure and partially because you don’t want to continue to carry dogs with you.
Not stupid, the stupid ones are the people that think tax deductions save them 100% instead of whatever the tax rate is lol. Some people think they can just avoid paying taxes by giving all the money they’d owe in taxes to charity, for example.
Some investors see the end of the year as a good time to review their portfolios and harvest any losses that may benefit them come tax time. This timing helps investors see the full year’s performance, focus on underperforming assets, and potentially reduce taxable gains.
When considering tax-loss harvesting, it is a good idea to review a portfolio for underperforming assets and focus on those trading below purchase price. These may include stocks, ETFs, or mutual funds that haven’t met performance expectations or have recently dropped in value. Investors can consider current market trends and recent volatility, as market downturns can present valuable tax-loss harvesting opportunities. Even quality assets can experience short-term dips, making this an ideal time to capture a loss while retaining the flexibility to repurchase after the 30-day wash-sale window. Also, identifying investments that no longer align with an investment strategy or have limited recovery potential—like companies with structural issues—can be good candidates for tax-loss harvesting.
There are various reasons to strategically take advantage of tax-loss harvesting. If you expect to have more capital gains this year than next, you may want to unload, at least temporarily, underperforming stocks to reduce your tax liability for the current year or defer gains to the following year. By using losses to offset current gains, an investor can defer capital gains to future years. This deferral allows more funds to stay invested and compound over time, which could improve overall returns in a tax-efficient way. If your total income is close to being in the next bracket for long-term capital gains tax rates, you may choose to harvest a loss to prevent paying a higher tax rate on some of your capital gains. For those who expect a higher-than-usual income or large one-time gains (e.g., selling a property or a business), tax-loss harvesting can help offset the tax impact in that specific year. Investors may use tax-loss harvesting for many reasons as part of a comprehensive tax plan, particularly if they have significant gains for the year or are in a high tax bracket.
“Tax losses are good” in the sense that it helps you offset gains/other income.
It’s pretty much always better to not have the loss in the first place, but we are not always in control of that. You’re not gonna make money by showing losses, but you can use the losses to reduce your tax burden from other gains.
You don’t plan to have a loser stock. It just happens. So take advantage.
Bevin said:
You don’t plan to have a loser stock. It just happens. So take advantage.
You should just avoid individual stocks altogether and stick to index funds like VOO.
Would you rather lose $1,000 or $800? Without tax loss harvesting, you’ve lost $1,000. Tax loss harvesting puts $200 into your pocket in the example.
Losing money is bad, but losing less money is less bad. Sometimes, a stock doesn’t do what you thought it would do, so you get out. Might as well harvest the loss for tax savings.
Paper losses are good for taxes. With harvesting, you only sell that loser if you did not think it had a chance to recover its losing position. At that point, it’s better thought of as a potential “tax asset.” It’s an asset because the paper loss when sold can reduce your taxes, not to mention free up cash flow. But it’s an intricate balance.
They are “good” just like getting a lower-paying job is good because you pay less taxes.
Well, in that scenario you’ve actually gained $15,200 between the two stocks and taxes.
A stock trade that loses value isn’t good. But if you already have one stock that’s up $20,000 and another stock that’s down $1,000, then it’s good to sell them both in the same tax year.