Tax Loss Selling
I’m always looking to make more money and increase the returns on my portfolio. I look at every trade, good and bad, and think about how I could put more of the green stuff in my pocket. Ultimately, this is what investing and trading is all about. No doubt you think the same way.
In the lives of many people more money is not just a nice thing to have. More money is the difference between take-out Chinese and fine French dining. More money is the difference between the kids attending state school or private school. It’s also the difference in retiring . . . sooner rather than later. This is why I am so focused on increasing portfolio return.
This time of year is generally a happy one for most people. Holiday cheer is in the air and everyone is smiling and bringing good tidings. I’m smiling for another reason. This time of year is when I can increase my overall portfolio return by making one simple trade. The amazing thing is that nearly every investor can make this same risk-free trade. Yet most don’t.
What’s this trade you ask?
First, a little background. This year has been a very good one for our flagship trading service, The Option Forecast. Gregory Petriekis, who you may recognize as a special contributor to The Dynamic Wealth Report, has had a number of sizeable winning suggestions. Subscribers to The Option Forecast no doubt remember when he suggested the purchase of Monsanto (MON) call options earlier in the year. The stock quickly moved higher and those option investors now find themselves with more than a 900% return!
A small investment of $2,500 is now worth more than $22,500 – $20,000 in profits in only a few months.
Now gains like this are great, but there is one downside – taxes. Uncle Sam always wants his share of the profits.
Please know that I don’t think the US government always spends our hard earned money the right way. As a matter of fact, I disagree with how they spend a great deal of our money. But, one of the great things
about the United States is that we are under no obligation to pay the government one penny more than we absolutely must.
One of the simplest strategies to limit your tax bill is end of year tax loss selling. Now I will caution you, I’m not a tax accountant or attorney, but tax loss selling is something I do in my own accounts. Here’s how I do it.
At this time of the year I look at my entire portfolio and find those few investments that are performing poorly. I then sell these investments for a loss. This loss then offsets the gains I have in other investments like Monsanto.
Now why is this trade so powerful? Let’s look at the numbers.
With the $20,000 you made on the Monsanto trade and assuming you’re in the 25% tax bracket . . . Uncle Sam will be asking for $5,000 before long. By implementing the tax loss strategy and offsetting the gain with a loss you effectively get to keep that $5,000 for yourself.
That is a big slice of return you get to keep when compared to your original investment of $2,500!
Now once you sell these investments you can’t just go back and buy them the next day. By law we need to wait something like 31 days or more or they won’t recognize the sale for tax purposes.
But what if you still want to own the security you just sold? In other words, you want to hang onto the security but also want the tax loss.
The solution is simple.
I look for investments that are similar to the one I am selling.
Let’s say that despite our warnings you held onto your investment in the iShares Dow Jones U.S. Financial Sector Index Fund (IYF). These shares are down some 23% from their high point this year, but you think they might rally in the next month or so.
To get the tax write off, you’ll sell the iShares and then immediately invest in another, similar ETF . . . let’s say The PowerShares Dynamic Banking Portfolio Fund (PJB). Surprisingly, these very different ETFs happen to hold very similar stocks.
You have sold one investment to harvest a loss and cut your tax bill. At the same time you have used the money from the sale to buy a different security and still retain your exposure to that market.
The best part is . . . you just increased your effective portfolio return by a tremendous amount in a matter of mere moments.
Category: Stocks
