Friday, December 16, 2016

Tax loss harvesting plan

At the end of the year, I perform tax loss harvesting to get a larger tax return in the following year. I usually try to hit -$3000 in net losses, which in my tax bracket allows me to get +$1000 back on my tax refund (state + federal).

You can only claim up to -$3000 in net losses per year and any more can be moved forward to the next year. Last year I had around -$4000 in losses so I carried forward -$1000 which can be used this year.

Currently I'm sitting at +$1869 in net gains for 2016. I need losses to offset that down to negative territory. I don't want to sell every little position that has small losses since the commission adds up. I will only sell large losses. The one's I am considering are:

MDT: -$414
HRL: -$392
CLX: -$148
SJM: -$102
NKE: -$287
KMB: -$103
I don't have any other names worth considering since it's not economical due to commissions.

Give or take this is only around -$1500. Frankly, my portfolio does not have as many losses as gains.
If I were to carry forward the -$1000 from last year with the -$1500 from the names above, I will only net -$631 in tax loss harvesting for 2016 which will only give me $157 cash I get back on my tax refund...

The other option I have is to just not do any selling this year for tax loss harvesting and keep those 6 high quality companies I listed above since they are all doing very well still. I can carry forward the -$1000 from last year and offset this year's +$1869 gains to only be a net of $869.  I will have to pay tax on this amount and I guestimate after all of my tax deductions it may be around $260 that I have to pay the IRS.

There are several negatives with tax loss harvesting. One is you will be out of your position for at least 30 days. If your position rises then you will not benefit unless you find an equity that performs in lockstep. The second issue is that tax loss harvesting lowers your basis even further. If you sell the stock at a loss and then purchase it back 30 days later at the same price you sell it, you will have a lower cost basis than you started with. In the future if you decide to sell the shares, you will have a higher tax to pay due to the lower cost basis. The other disadvantage is commissions. Selling 6 companies will cost for most brokerages 6x $7 = $42 in commissions. Tax loss harvesting is usually accompanied by buying as well since most investors want to stay invested. Commissions can total $100 for a scenario like this which isn't cheap.

In the end I am leaning towards not doing anything for 2016 and just using my carry over -$1000 from last year to offset my gains in 2016.

Disclaimer: Before taking any action on your assets, please consult with your tax advisor on what course of action is best suited for your investment plans.


  1. I've rarely done tax loss harvesting mainly because it's really best to start thinking about it in November and I always seem to forget about it. One way to get around the wash sale rule and being out of your position is to buy whatever number of shares you're thinking of selling for tax losses at least 31 days prior to the sale. Then sell the ones that you want for harvest after that 31 days and you can still keep your position and harvest your losses. The drawback to that is (1) you have to start thinking about it and planning for it in November (2) you double your exposure to that company during those 31 days (3) it requires a decent amount of capital to implement since you are doubling your position (4) the markets could always make a decent move either up or down so you no longer have the losses or now you've just compounded your losses since your position is double. But there are ways to get around not owning that company, but it just requires a lot more planning.

  2. Why sell any high quality assets at all? Buffett advises against letting taxes determine investment decisions.