No one likes to lose money but, as they say, you must “play the hand that you’re dealt”. If you are a long term investor, it is likely you have some built up unrealized gains over the years. For example, despite the S&P 500 being down -16.3% so far this year, it is still up +31.2% cumulatively over the last three years. Conversely, unfortunately, some diversifying positions have not done so well! This includes emerging market high dividend equities (DVYE) that are down -20.9% cumulatively over the past three years, while being down -31.0% this year alone.
The tax codes do allow some respite for taxpayers with investments in taxable accounts through the deduction of up to $3,000 of net realized losses against ordinary income. In this current year, it certainly makes economic sense to take this tax loss selling to save a bit in taxes.
Another, less utilized, tax loss selling strategy is to realize GAINS on long term holdings and immediately buy them back at the higher cost basis while offsetting the gains with tax loss selling. The net result of this kind of transaction is to raise the cost basis so that taxes will NEVER be paid on those realized gains. Let’s run through the rationale for this kind of transaction.
If a taxable investor has a taxable account with $100,000 in unrealized gains, he could realize the gains and have a net after-tax gain of $80,000 (assuming a 20% tax rate). But, if there are $100,000 of other realized losses in the portfolio he could offset the gains completely and NOT pay the $20,000 tax in the current year. Going forward, the $100,000 of realized gains are completely sheltered from taxes and the $20,000 in realized gain tax will NEVER be paid on that $100,000. Of course, the investor would much prefer there being NO offsetting losses against the $100,000 unrealized gains, but at least this is a way to make the best of other losses existing in the portfolio.
This is NOT tax advice since there are many other investor-specific issues to consider, including wash sale rules, taxable situation, overall portfolio management and risk preferences. I do not recommend this as a DIY transaction since there are many pitfalls. D&A manages all client taxable accounts with a “tax-aware” strategy.