What Investors Need to Know About Tax Loss Harvesting

Selling stocks at a loss can be a tough decision to make: no one wants to admit that they made a bad investment. Come tax time, however, strategically realized losses can help lower your capital gains tax liability, thanks to a strategy known as tax loss harvesting.

With tax loss harvesting, an investor sells a security at a loss, and by realizing that loss, offsets some of the taxable gains from the same year. The investor then typically replaces the security they sold with a similar one, in order to  remain in line with their target asset allocation, while taking care to avoid wash sales.

“It makes sense if you have a lot of short term gains,” says Mark Tan, a financial advisor at Thrivent Financial.

 

Higher earners benefit more

Investors in higher income tax brackets see more benefit from tax loss harvesting, as they typically have a higher capital gains tax rate and have more liquid assets to invest.

According to Aaron Gubin, head of research at SigFig, this strategy is most beneficial for investors who have taxable accounts exceeding $100,000 and make reasonably large, continual deposits throughout the year.

That’s because any time an investor sells a stock to realize a loss, they effectively reset their cost basis to a lower level. In order to perform tax loss harvesting again, that investor should purchase stocks at a higher price in the future, and then sell again at a loss further down the road, to offset the gains. (If it sounds complicated, it can be. Investors considering this strategy should consult with a tax or accounting professional for advice pertaining to their specific situation.)

According to SigFig data, 26% of investors with portfolio values between $250,000 and $1 million engaged in behavior indicating possible tax loss harvesting in 2014 (they executed 30% or more of their annual trades in December). Among investors with portfolio under $250,000, only 11% engaged in this type of behavior.

 

Think of tax-loss harvesting as an year-round strategy

Many investors engage in tax loss harvesting at the end of the year, but it should really be a year-round strategy, according to John Sweeney, executive vice president of planning and advisory services for Fidelity Personal and Workplace Investing. “There is market volatility all year that presents opportunities,” he says.

However, investors should be aware of the costs, such as transaction fees incurred when making trades, or redemption fees charged by some funds if a position is eliminated during a holding period.

Additionally, wash sale rules prevent investors from claiming a loss on a security, if they end up buying it again within 30 days of selling it.

At the end of the day, while tax events matter, investors should not make moves solely for the sake of reducing their taxes. Selling a stock at a loss just to offset gains means you might miss out on appreciation in the future. “Don’t let the tax tail wag the investment dog,” says Sweeney. “Make your investment decision first, and think about the tax consequence second.”
Donna Fuscaldo is a freelance writer based on Long Island, NY. Her work appears on Foxbusiness.com, Bankrate.com and Glassdoor.com.

Learning about personal finance, tweaks to improve retirement, Apple, and China

1. Khan Academy and Visa have created a multi-part series on personal finance. Ever wondered what it means to buy company stock, or how an open-ended mutual fund works, or what bonds are? (Via Reddit Personal Finance.)

2. On retirement, The New York Times shares recent advice from some financial advisers on small tweaks that help investors save more and trim risk:

Your retirement portfolio may be bigger than you realize. At least it would be if all your resources — your salary and home and not just the 401(k) plan at work — were enlisted to accumulate enough wealth to satisfy your needs and wants in old age, some financial advisers say.
 
Factoring other assets and income streams into a financial plan can provide greater ease and flexibility in meeting goals, these advisers say. Such an approach may be especially useful now because the low income that many assets pay is causing savers to make their portfolios work harder than they should when sensible adjustments, like spending less and contributing more, would accomplish the same objective.

3. Apple announced a 30% year-over-year revenue increase… and its stock promptly dropped 4.5 percent. Marketplace has a piece that reminds us that the stock market is fueled by investor expectations. (Related, we shared recently an update of our AAPL optimism index.)

4. China’s stock market has been in the headlines. The Economist provides a quick primer:

Kind of looks like Half Dome

The great Charles Kindleberger described the pattern of how bubbles form and then burst in his book “Manias, Panics and Crashes”. His model, which was linked to the work of the economist Hyman Minsky, saw the process as having five stages: displacement, boom, over-trading, revulsion and tranquillity. China looks like it is following the model pretty closely, having reached stage four already.

Behind the numbers are regular Chinese investors riding the volatility, whom the New York Times chronicles:

China fell under the spell of the stock market over the last year, as millions of factory owners, university students, wheat growers and other investors jumped at a chance to strike it rich.
 

“When we eat breakfast, we think of the stock market. When we sleep, we see flashing red and green screens,” said Elizabeth Xu, 37, a customer service supervisor at an electronics company in Shanghai, who invested $2,500 last fall. “This is our new sport.”
 

But with the market stumbling in recent weeks, investors are now engaged in a national game where the risks are increasingly outweighing the rewards.

 
 
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Unimpressed by Apple Watch, are Investors Tapering Their Optimism?

Individual investors have had a long love affair with Apple (AAPL). SigFig data has shown that it is one of the most popular stocks for investors of all ages, and over the past few years, SigFig users have not just held the stock but continued to acquire more of it. However, recent data suggests that some investors’ optimism may have waned in the lead-up to the company’s first earnings announcement that will include sales figures on the Apple Watch.

Our Apple Optimism Index tracks the portion of investors trading Apple stock who are buying versus selling it. Since 2011, we’ve seen steady interest in the stock. During most weeks, more Apple investors are buyers than are sellers, but buying tends to spike immediately prior to  product announcements. For example, 69% of Apple investors were buyers right before the announcement of the iPhone 4S, and 72% were buyers in advance of the iPad mini announcement.

Web

At first, investors showed similar excitement about the Apple Watch. In the week leading up to the first announcement of the product in September 2014, 75% of Apple investors were buying the stock and only 25% were selling. Leading up to the March 2015 Apple event in which the company gave the world a closer look at the watch, almost 70% of Apple investors were buying.

More recently, however, buying activity has dipped. In the week leading up to this quarter’s earnings announcement, less than 60% of Apple investors have been buying, and as many as 40% of Apple investors are selling the stock. There has been a lot of speculation that sales of the Apple Watch will not  compare favorably to those  of the iPod or iPhones. Recent buying and selling behavior suggests that some individual investors may expect disappointing news from this quarter’s earnings.
 

Of course, with 60% of Apple investors buying the stock, a majority of investors are still betting on the company to continue to outperform. However, our Apple Optimism Index suggests that investors are not as optimistic about this quarter’s earnings as they have been about other major events in Cupertino.
Sarah Morgan is a freelance writer and editor based in Brooklyn. Her work has appeared on SmartMoney.com and in the Wall Street Journal.
The Editors
Aleks Todorova

Aleks Todorova

Editorial Director

Aleks runs content at SigFig. Before joining the company, she ran the editorial teams at Visually and Mint.com. Her work has appeared on SmartMoney.com and the Wall Street Journal, among others. At lunchtime and on weekends, you'll find her swimming, biking or running -- or all three, in that order.
Benny Wijatno

Benny Wijatno

Data Science and Analytics

Benny does all things data and science at SigFig. He was Director of Product Analytics at TinyCo and a Principal at Applied Predictive Technologies, where he helped companies run smarter experiments. He studied Economics at Harvard, is an avid cook, and loves running.