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Turn Your Losses Into Potential Profit Like Donald Trump

No one can predict the stock market perfectly — inevitably you will either hold or sell investments at a loss.  Here’s how to turn temporary setbacks into potential huge wins.

-If you’re convinced the investment could still increase in price, buy it 31 days before or after selling it to harvest your loss.  (There’s a 30 day “wash sale” rule, and can disqualify transactions for tax benefits.)
-If you’ve changed your mind and believe the stock or investment will not increase in price, sell to harvest your loss.

In either case, keep track of your loss so that you can “harvest” them when you file your taxes to offset other income.  This results in a 30% or more rebate (on short-term taxes) on other income courtesy of Uncle Sam!

This strategy can even work if your average cost per share is lower than the market price.  Say what?  This might work even if it looks like you’re sitting on a profit!

Here’s an Example: Mr. CentsAndSense.com has invested $40,000 in Bank of America “A” Warrants.  His average acquisition cost is $4.44 and let’s say that the warrants are trading at $4.60.  Because he’s currently up his strategy is useless, right? Wrong.

Half of Mr. CentsAndSense.com’s investments were initially acquired at $5.00, while the rest were acquired at $4.00.  Thus, he is sitting on a loss of $1,600 on his $5.00 warrants (4,000 warrants @ $5.00 sitting on a $0.40/warrant loss), and a $3,000 gain on his $4.00 warrants (5,000 warrants @ $4.00 sitting on a $0.60/warrant gain).

His $5.00 warrants are a prime target for tax harvesting, and can accrue an immediate $560 tax-year benefit (@ a 35% short-term tax rate).

tax-loss-harvesting-chart-example

 

Here’s How This Strategy Makes Cents:

First, you get an immediate benefit in reducing your tax bill by claiming your losses immediately — while continuing to delay paying taxes on current or potential gains!  This benefit is a 100% gain if you have not been harvesting your losses.

Second, you can arbitrage your tax payment to earn extra savings!  In the example above, Mr. CentsAndSense.com claimed a 35% short-term tax benefit on other income while keeping the number of warrants in the investment the same.  In the future, if he sells those investments after a year, he only has to pay 15% to 20% long-term in capital gains tax.  He just cut his potential tax bill on his gains by 50% or more — that’s huge!

Third, even if the economics work out where you do not save any money on harvesting your taxes (you “wash out” your losses, or you aren’t able to take advantage of short vs. long term tax arbitrage, etc.) there is an intrinsic benefit to deferring your taxes.  What?  

Let’s say you claim a 15% long-term tax benefit on a long-term loss, and then paid out the same 15% long-term capital gains tax on a long-term gain, netting out to the same tax bill at the end a couple years from now.  What matters is that in the time between your tax benefit and your payment in taxes, you basically earned an interest free loan from Uncle Sam — and this little difference can add up and compound over time to make lots of cents.

Here’s How Mr. CentsAndSense.com Implements This Strategy:

First, he confirms that his planned warrant sales would be “first in first out,” meaning his higher cost initial acquisition at $5.00 will be the first ones out, and that he wouldn’t be selling his $4.00 warrants.  That, or his broker allows him to specifically pick which warrants he can specifically sell — so he knows he can choose his $5.00 warrants.

Second, he either buys the number of warrants he wants to replace 31 days before selling his $5.00 warrants, or he sells his $5.00 warrants and waits 31 days before buying at whatever the market price is.  He chooses to buy his replacement warrants first because he thinks the shares are worth more, and doesn’t want to miss out on any appreciation.

Third, he tracks his losses and “harvests” them in his upcoming tax return.

Bottom Line: Harvest your tax losses to save hundreds, thousands, or more a year!

Couple Notes:

-Short-term losses are more valuable than long-term losses, since short-term income is taxed at a higher rate.
-You have to claim your losses in your tax return in order to successfully harvest them, and you need appropriate records of your “loss.”
-You shouldn’t try for losses to take advantage of this trick — but if you happen to be sitting on losses, this strategy can make lots of cents.
-If you’re thinking of adding $$ to your retirement account, and are sitting on losses in your taxable accounts, this could be a good strategy to use to start transferring funds from your taxable to tax-benefit retirement accounts.

How Much Can You Save By Harvesting Your Losses?


The ideas contained above are for discussion purposes only, and do not constitute tax or financial advice.  Please see our disclaimers for more info, and consult a real professional :).

2 thoughts on “Turn Your Losses Into Potential Profit Like Donald Trump

    1. Hi Janice! Thanks for your comment! If I can summarize the post above, if you’re convinced you want to do this, you can:

      1) Sell your stock at a loss to harvest the taxes and buy a similar (but not the same security) right away
      2) Buy the same or similar security 31 days before or after selling the original position at a loss

      In either case you want to be careful of wash sale rules

      Hope this helps!

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