CKBlog: Strategies

Wednesday, October 11, 2017

Looking for Losses

by Steve Haberstroh, Partner

The summer has come and gone in the U.S. Fall is here. So while many people are excited about this year’s harvest at the local apple orchard, the Investment Committee here at CastleKeep is focused on a different kind of harvest: tax losses. Yes, it may sound peculiar, but we are currently looking for losses in our client portfolios. And you should be too.

Before I continue, you should know that I am not a CPA, nor is anyone at our firm. What I describe in the coming paragraphs should not be construed as specific tax advice. Instead, what I am describing is a general but often useful strategy that may potentially help you reduce your tax bills. You should ALWAYS consult with a qualified tax professional regarding your unique tax situation.

How does it work?

Tax Loss Harvesting is a simple concept: identify capital losses which can offset capital gains on other portfolio holdings. Let’s say you bought $10,000 worth of Apple stock several years ago, it’s worth $20,000 today and you were considering whether to sell the shares and take profits. Assuming a 15% tax rate on long-term capital gains (holding period of one year or more), you’d be on the hook to pay Uncle Sam a $1,500 tax bill on that trade—how patriotic of you!

But let’s assume you were less than thrilled to part ways with $1,500 and were looking for an acceptable way to reduce or perhaps eliminate the tax bill associated with this trade altogether. After combing through the rest of your brokerage statement for losing trades (rare, I know), you remember that your Uncle Bruce convinced you to buy $20,000 worth of Blackberry stock six years ago (he loved the keyboard) and those shares are now worth $10,000—representing a $10,000 loss (his fault, not yours).

In this case, if you believed Blackberry’s best days were behind them, and decided to sell your shares, you would realize a $10,000 long-term capital loss which could be used to offset your profits in Apple. Taking losses never felt so good!

Now, as always, it is prudent to discuss this strategy with your tax professional because the process may be more complex based on your personal situation. For example, you will want to be careful of the “wash sale rule” which disallows an investor from deducting losses if an identical security is purchased 30 days before or after the sale (this also holds true in IRAs). So in the case above, you’ll need to wait for 30 days before considering to repurchase shares of Apple. Keep in mind that this strategy and the wash sale rule also apply to ETFs and mutual funds. 

More information on the “wash sale rule” can be found in the following article on Schwab’s website: A Primer on Wash Sales.

But I love my losers!

I know, we see it all the time. Investors tend to get emotional about their holdings and become reluctant to sell. It’s actually called the “Endowment Effect” in behavioral economics, where an individual ascribes a greater value to objects simply because they own them. See Endowment Effect on Investopedia.

We can help you rationalize the investment thesis behind your “losers” and analyze whether they may be good candidates for Tax Loss Harvesting.

So do yourself a favor. When you are finished planning your Oktoberfest celebrations and have picked out your Halloween costume, scour through your brokerage statements looking for losses—it can be so much fun! If you don’t have the time or the interest, let us help. There may be hidden value in your losses.