Tax loss harvesting

The US has a complex tax code.  That means people are always looking for ways (hopefully legal) to reduce the amount they owe in taxes.

Tax loss harvesting is one way you can do just that.  The option isn’t always available; you need to have investment losses which means you can only do it in years the market is down.  Through November, US stocks were slightly down for the year while International stocks were down significantly.  That created the situation where you might be able to do some harvesting.

There are some intricacies with the tax law here.  Remember that I am not an expert, so if you do this, you may want to consult a tax professional.


What it is

We all know that when you make money in the stock market (sell stock for more than what you bought it for), you are taxed on that gain.  That’s called a capital gain.  The opposite is true for losses; when you have a loss (sell for less than what you bought it for), you can reduce your taxes.  Wait for it . . . those are called capital losses.

Tax loss harvesting is selling some of your investments at a loss, and then using that capital loss to reduce what you owe to the government in taxes.


How to do it

The strategy is pretty simple.  When markets are down you can sell some of your investments at a loss.

Then at the end of the year, you can claim that loss on your taxes.  The loss will offset any stock gains you have (either capital gains or distributions/dividends).  If you still have losses after those have been offset, you can reduce your taxable income by up to $3000.  That last part is a pretty sweet deal, especially if you are in a higher tax bracket.

Tactically, you just go to the website with your accounts ( or or where ever) and sell those investments which have a loss.  The in April when you pay your taxes, you get the tax forms from your brokerage house, and put those in your tax forms.  Easy.


Why it’s important

The major benefit is that you are reducing your tax bill . . . now.  Notice how I said that.  Ultimately, you’re doing all this to lower your tax bill now and have it increase at some point in the future.  Make no mistake, at some point or another you will need to pay taxes on your gains, it’s just a matter of when.

Obviously, having more money now instead of giving it to the government is a good thing, even if you’ll have to give it up later.  Beyond that, there is the potential to create real dollar savings instead of just delaying when you pay taxes.

Capital gains and qualified dividends are taxed at three different rates, depending on your income.

Income (for married couple) Tax rate
$0 to $77k 0%
$77k to $600k 15%
$600k+ 20%


If you can use tax loss harvesting to influence when you pay taxes on those capital gains, there is the potential to recognize them when you’re in a lower tax bracket.

For Foxy Lady and me, we are in that middle tax bracket, so we would pay 15% on any capital gains and qualified dividends.  However, if we did harvesting now and then recognized those gains in a year when our income was lower (below that $77k threshold), it’s possible that we could lower our rate from 15% to 0%.  That’s real savings.


Doesn’t that defeat the purpose of investing

When you tax loss harvest you’re selling your investments, obviously.  That could lead to another problem that you’re pulling your money out of the market, and you’re pulling your money out when stocks are down which seems like the absolute worst time.  Likely you don’t want to do that; certainly, all other things being equal, pulling your money out at a loss isn’t what we’re going for with investing.

Actually, you can just trade your investments.  So you can sell mutual fund ABC at a loss and simultaneously use those proceeds to buy mutual fund XYZ.  You get the benefit of the tax loss but stay in the market.

The IRS understands this and has rules.  You can’t sell ABC, recognize the loss, and then immediately buy back ABC.  You have to wait 30 days to do that round trip.

However, you can buy something similar.  The IRS says it can’t be too similar, but they don’t strictly define that so it’s a gray area.  I personally, think it’s fair game to sell a broad mutual fund and buy another that is similar but still different (maybe a total international mutual fund gets sold and a total world mutual fund gets bought).  You are still fully invested and largely have similar exposure, but you get that tax loss which is the whole point.


I don’t think this is something that is going to make you rich (like asset allocation or lowering fees—those strategies will make you rich).  But it could net you a couple hundred or maybe even a couple thousand dollars.  Who says “no” to that?

Top 5 investing highlights from 2018

We’re all getting used to me going for extended periods without writing a blog post.  I’m sorry about that, but I’ve had a consulting job for the past couple months that has been keeping me busy.  It’s starting to wind down, so I should have more time to consistently write posts.  As always, thank you for sticking with me.


Wow!!!  It’s been a crazy few months in the stock market since I’ve been gone.  I figured for my first blog back I would give you my list of the craziest/most interesting things to happen in the investing world the past few months.  Some of these deserve their own post, so we can dive deeper into those in future posts.

Without further adieu, here are my Top 5 investing highlights since April:


5. Interest rates on the rise: 2018 has been the year of the interest rate increase by the Fed. In response to the 2008 financial crisis, the Fed cut interest rates to nearly 0%.  There they stayed for nearly the entire 8 years of the Obama administration.  It was only in December of 2015 that the interest rate was raised to 0.5%.

Since 2015, there have been 7 rate increases (including 3 so far in 2018), bringing the Fed rate to 2.25%.  This stuff makes finance nerds giddy, but it does have real-life impacts on the rest of us.

I think the biggest direct impact is that mortgage rates have started to go up.  Now a 30-year fixed mortgage is at about 5%.  A couple years back it was at 3.5%.  That’s a major change that could mean hundreds of dollars per month on a families mortgage.  This impact stretches to housing affordability (gets worse) and number of families refinancing (goes down).


4. Massive tax law passes: I know the big tax law passed in December 2017, but I feel a lot of the ramifications hit in 2018. By mid-year it seemed the impact was starting to hit the market—GDP growth was higher than it had been in a really long time, unemployment was lower, and because of the low unemployment inflation had kicked higher.

The immediate impact of the tax break had a major boost to the markets in late December and early January.  Then there was a huge market drop in late January and early February.  However, it seemed that the benefits of the tax breaks (higher GDP, lower unemployment) started boosting stock, with the US markets hitting all-time highs in September.

Obviously, since September stocks have been on a major slide, but we’ll leave that for reason #1.


3. US elections in November: Politics are different from investing, but obviously they are connected. The soap opera that is Washington DC hit a fever pitch on November 6, with an unusually high amount of drama for a off-election.

Republicans increased their majority in the Senate, while Democrats gained enough seats in the House of Representatives to take over that chamber of Congress.  The headline was obviously that the US would have a split government for the next two years.

Pundits spent innumerable hours debating the impact split government would have on the nation broadly and the investing markets in particular.  The common thinking is that split government is a good thing in that government can’t make major changes, giving some level of predictability for business.  I tend to agree with that.  In fact, when you look at the data, the stock market does best with a split government.

In case you were curious, the market was up 2.1% the day after the elections, so clearly the markets liked the outcome of the election.


2. America is #1: I had a blog on this a while back, but I’m still fascinated by this phenomenon. As of now, US stocks are down 2.2% for the year while international stocks are down 14.2%.  That’s a 12% difference!!!  That’s huge!!!

Curiously, they stayed fairly coorelated all the way through April.  Then, starting in May, they really began to diverge.

The reasons aren’t entirely known.  Many people have many opinions, and I imagine this will be examined for years.  However, my belief is it’s a combination of the US winning the trade wars, China’s economy slowing down, and Europe figuring out Brexit and the future of the EU.

Who knows if I’m right or wrong.  But certainly this is interesting.


1. The rollercoaster that is the stock market: It has been a wild ride all of 2018.

January started out on fire, then the stock market took a huge dump in February, rallied towards the end of the month, fell again in March, then plodded out a 8-month upward march that peaked in September, and has since fallen to its current levels.

Those a 6 distinct moves, all of which are major.  I’ve talked about how I think volatility is becoming more inherent in the market, so I think that’s a piece of it.  But the change of directions this dramatic is definitely an unusual twist.

And we still have a month to go.  Stay tuned.