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When Losing is Winning

Imagine this situation – we walk into an office building and hop into the first elevator we see, hoping to go to the 20th floor. We didn’t notice, though, that the elevator was already heading down and wind up in the basement instead. At this point, someone offers us $1,000 to walk across the elevator bank and take a different elevator from the basement to the 20th floor. Good deal? Well, there happens to be a similar deal in investing. We invest to earn a positive return over the long term, but sometimes stock prices do fall. Selling out of stocks whose prices have fallen and reinvesting into similar companies allows investors to get a similar deal.

Here’s an example:

Let’s say you own $20,000 worth of Chevron stock as part of a diversified portfolio, which you originally purchased two years ago for $25,000. Let’s also say you’re sitting on $50,000 of long-term capital gains for the year. This Chevron position plays a key role in your diversified portfolio, representing a portion of the energy sector of your domestic large cap stock asset class. Therefore, selling out of it entirely and leaving it in cash to book the $5,000 long-term capital loss ($20,000 of proceeds minus $25,000 of cost basis) wouldn’t be desirable; rather, you sell the position, and reinvest the proceeds in the stock of a company with a similar business model, like Exxon Mobil. Doing so allows you to book the $5,000 loss and maintain your overall level of diversification.

So what do you do with the $5,000 loss? It is applied to the $50,000 of long-term capital gains you’ve generated during the year, bringing your overall long-term capital gains incurred during the tax year down to $45,000. In other words, assuming a 20% long-term capital gains rate, you just saved $1,000. What if you have losses in a tax year that exceed your gains incurred during that same year? For example, an individual with $30,000 of long-term capital losses offsets $5,000 of long-term capital gains in the year and has $25,000 of long-term capital losses remaining. $3,000 of those losses can be applied towards offsetting income earned in the year and the remaining $22,000 is carried into the following tax year, to first offset any gains incurred in the year and, to the extent any losses remain, to offset up to $3,000 of income. It is important to note that this “carry forward” concept applies at the Federal level of taxation; treatment of carry forward losses at the state level varies from state to state.

One caution to keep in mind when harvesting losses in your portfolio is to make sure you avoid violating the wash sale rules; a wash sale occurs when an investor sells a stock at a loss and, within 30 days before or after the sale of that stock, purchases substantially identical stock. Using our example above, the wash sale rules would be violated if the investor repurchased the Chevron stock; purchasing Exxon Mobil instead of Chevron helps to avoid the wash sale rules while at the same time booking the loss on the Chevron position and maintaining a diversified portfolio.

Tax loss harvesting in taxable accounts is one of the ways RegentAtlantic look to adds value to a client’s overall portfolio management process. If you are wondering whether your portfolio is making the most of tax loss harvesting opportunities, please take advantage of our Second Opinion offering.

 

Important Disclosure Information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable. Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

The mention of any specific security in this article is not an endorsement by RegentAtlantic to buy or sell that security.

Please remember that RegentAtlantic does not provide tax advice. Please consult with a tax advisor or your choosing prior to implementing any strategy discussed in this article.

This article is based on RegentAtlantic’s current understanding of tax legislation. Congress may change this legislation at any time.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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