It’s that time of year when you get gifts from Santa. However, for some individual investors in the USA, the taxman can also give a gift: tax loss harvesting.
Tax loss harvesting is when you offset your capital gains on any stock positions which have made money against any capital losses from stocks which have lost money. The idea is to reduce the tax burden from the original capital gain by selling out of profitable positions and reducing the net taxable profit by offsetting and selling unprofitable stocks.
However, there are nuances to consider which we highlight below:
Nevertheless, the real question is whether employing such tax saving strategies unbalance your overall risk tolerance, investment objectives and portfolio composition. Here are some things to consider:
For example, this UHNWI investor has a diversified portfolio with ~60% in equities and has ~19% exposure to the Financials sector.
When looking at tax loss harvesting strategies, they could consider closing their BNP Paribas position which has generated a P&L of $132,429 and offsetting some of this gain by selling their Citigroup position which has made a loss of -$63,405. However, in doing so, they may alter the balance of their portfolio as the BNP position is 6.1% of their total portfolio and this may upset the equity and sector mix that they are currently comfortable with.
Once you have decided which instrument to sell to offset a gain, you need to look at the actual cost basis. For example, this mass affluent investor bought Build-A-Bear over the year and has generated a profit of $4,305. Against this, they have a running loss with Microsoft at -$2,045. Note the current Microsoft share price is $238.73.
However, when they look at their transactions, they bought Microsoft twice over the year. On reflection, they may prefer to only sell the 30 Microsoft shares bought on 1 Feb 2022 at $308.76 as opposed to also selling the 15 shares bought on 3 Oct 2022 at $240.74 as the former has a higher cost basis. This doesn’t offset as much of the Build-A-Bear profit but there may be other reasons to hold onto at least some of the Microsoft position that fit within their overall investment strategy.
In all cases, it is best to consult with a specialist before deciding on whether to employ tax loss harvesting strategies when you come to rebalance your portfolio.
** Please note, you should always clarify your tax position with your accountant or financial advisor and this article is for educational purposes only.