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Tax-Loss Harvesting in Inclement Markets

Articles, JDH Blog, Michael J. Evans, The BAM Alliance

In some alternate universe, there may be markets where nobody ever experiences any loss and every investment just keeps growing. In our world, we know better. While markets are expected to climb over time, periodic downturns happen. When they do, they can leave you feeling left out in the cold. That’s why it pays to look for opportunities to leverage inclement markets through year-round tax-loss harvesting.Pair examining a chart
Tax-Loss Harvesting: An Overview
The concept of tax-loss harvesting is relatively simple. I’ll go into more detail in a moment, but the general goal is two-fold:

1. Realize a loss for tax purposes. When appropriate, sell assets at a loss and use the losses to offset taxable gains on other investments.

2. Keep assets in the market according to your investment plan. Buy a similar holding (one that’s not “substantially identical”) until you can reinvest those assets as originally intended without running afoul of the IRS’ “wash sale rule.”

In other words, tax-loss harvesting is not about abandoning your carefully crafted asset allocation by panic-selling a losing holding. It’s about achieving an available tax break while sticking to your disciplined investment strategy throughout.

What Is the Wash Sale Rule?

There are often several mutual funds and ETFs that make good substitutes for one another from a practical perspective. But when tax-loss harvesting, you cannot claim a deductible loss on a sale if you (or your spouse, for joint filers) sell a security at a loss and then buy the same security or a “substantially identical” one within 30 calendar days before or after the transaction. If you violate either of these conditions, the IRS’ wash sale rule will typically disallow the loss for current income tax purposes. Thus, it’s important to use caution in choosing “similar” funds.

A Tax-Loss Harvesting Illustration

It might help to see an illustration. Assume you purchase a fund for $10,000. Two months later, it’s trading at $7,000. You decide to harvest the short-term, $3,000 loss (short-term because the fund was held less than a year). With a 35 percent ordinary federal income tax rate, this can result in a $1,050 tax savings.

At the same time, you take the $7,000 from the sale and invest it in a similar holding. After 31 days, you can reinvest it back where it came from. As long as the market eventually recovers and the fund returns to the level at which you originally bought it, you’ve effectively lost nothing while gaining a $1,050 tax break.

There Is No “Tax-Loss Harvesting Season”

Maybe it’s because tax-loss harvesting is associated with tax planning, but many investors (and even some advisors) treat it as a strictly year-end task.

This is a mistake. Losses can occur any time of the year, and vanish by year-end. On the one hand that’s good, because it means your investments are no worse for the wear (if you remained invested). But if you skip the opportunity to also tax-loss harvest when the (hopefully) temporary losses occur, you miss the chance to lower your tax bill while you’re at it.
How It Works (and How It Doesn’t)
Now that you understand the basics, let’s cover some of the finer points. In a December 2015 MarketWatch article, Robert Powell shares BAM ALLIANCE Director of Investment Strategy Kevin Grogan’s advice: “Most investors should do tax-loss harvesting as long as the loss is large enough.”

But what is “large enough”? As I’ll explain in a moment, tax-loss harvesting opportunities are best considered on a case-by-case basis, but in the aforementioned article, Grogan offers some general starting points: For stocks, start with at least a $5,000 or 5 percent loss and for bonds start with at least a $5,000 or 2 percent loss.

There are additional factors to help you decide when a loss seems ripe for harvesting.

Transaction costs: Clearly, it won’t make sense to harvest a tax loss if the trading costs are going to erase the benefits. For example, say your tax break would be $100. You’re better off staying put if it’s going to cost you $80 to complete the trades involved (selling the holding, reinvesting in a similar one, and then ultimately repurchasing the initial investment).

Asset location: You cannot harvest losses from holdings that are in tax-sheltered accounts (such as IRAs or retirement plans). Because realized gains in these accounts are not taxable to begin with, they cannot be offset with any losses.

Market uncertainty: There can be times when the market is so extraordinarily volatile that you are better off just remaining seated. Remember, your goal for tax-loss harvesting is to sell at a loss AND invest in a temporary replacement holding that is similar (but not “substantially identical”). You then typically want to swap back to your original holding after 31 days. This ensures your portfolio remains true to your greater wealth plans.

When it’s time to complete a swap, it works best when the price of your replacement holding is the same or lower than the price you paid for it. Why is that so? Taxes. When you sell the replacement holding, if it’s gone up in value, you’ll incur short-term taxable gains, which could cost you more than the loss harvesting will save you.

Because highly volatile assets often incur large gains or losses over very short periods, tax-loss harvesting should be carefully executed if the market is highly unstable. For example, some advisors employed tax-loss harvesting where appropriate following the passage of the June 2016 Brexit referendum. Depending on your individual holdings and your ability to focus on careful execution, it might or might not have made sense for you to do the same.

Why Are Short-Term Losses More Valuable?

In our earlier illustration, we mentioned harvesting a short-term loss. Why would that matter? Again: taxes. Short-term losses are first deducted against short-term gains that are otherwise taxed at higher ordinary income tax rates. Long-term losses are first deducted against long-term gains that are otherwise taxed at lower capital gains rates. Thus, short-term losses are considered more valuable to your tax management efforts, especially if you are in a higher tax bracket.
The Takeaway
Given that periodic market losses are inevitable and inherent to investing, I’d recommend making the most of them when they occur. So consider employing year-round tax-loss harvesting as part of your overall wealth strategy – while also ensuring that the tax-loss harvesting “tail” doesn’t inappropriately wag the portfolio management “dog.”

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2016, The BAM ALLIANCE

Michael J. Evans, Founder, The Cogent Advisor

Michael J. Evans, Founder, The Cogent Advisor

The BAM ALLIANCE

Michael J. Evans is founder of The Cogent Advisor, an independent member of the BAM ALLIANCE.

Prior to founding The Cogent Advisor, Michael was a veteran commodities trader on the Chicago Mercantile Exchange for more than 20 years. He remains a proud member of the exchange.

Michael currently serves on the DePaul University College of Commerce Finance Advisory Board as well as the Lane Tech Alumni Association and The Irish Fellowship Club of Chicago. He holds a bachelor’s degree from the DePaul University College of Commerce and completed the graduate certificate program in Financial Planning at DePaul.

Visit Michael’s blog, The Cogent Advisor
Follow Michael on Twitter, @CogentAdvisor

As a “Chicagoan to the core,” we’re sure he had a wonderful day yesterday, the day the Cubs won the World Series.

November 3, 2016/by Matt Delaney
0 0 Matt Delaney https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png Matt Delaney2016-11-03 21:31:422018-08-14 03:35:37Tax-Loss Harvesting in Inclement Markets

Getting Comfortable With Change

Articles, Carl Richards, JDH Blog, JDH Newsletter, The BAM Alliance
By Carl Richards

Some of us really like the status quo. Even when we have a better alternative, many of us are content to keep on doing what we’re doing.

I think about this every time my wife and I swap cars. Depending on who is running what errands that day, we’ll switch between our big car and our little car.

Every time we change, my wife has this habit. It’s a very good habit, but it’s the exact opposite of what I do. Before she backs out of the garage, she adjusts everything. The seat slides closer and the mirrors get moved. She even fiddles with the height of the seatbelt. Only then does she head down the road.

I, on the other hand, just get into the car and slide back the seat (because I wouldn’t fit otherwise). But everything else I leave alone. Things are great — until I try to look in any of the mirrors. Because the mirrors are still where my wife left them, I can only see out of them if I slouch down and move back and forth. Read more

December 21, 2015/by Matt Delaney
https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png 0 0 Matt Delaney https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png Matt Delaney2015-12-21 20:22:202018-08-14 03:35:37Getting Comfortable With Change

Article by Tim Delaney Featured on The BAM Alliance

Articles, JDH Blog, JDH Newsletter

Tim was recently featured on The BAM Alliance website with an article he wrote about how we view the markets. The article – What Does Your Glass Look Like? – reminds readers that we shouldn’t listen only to the bad news the media sells investors. There is plenty of good news, too. And if you want to keep your sanity, it will do you good to have a positive outlook. Read more

November 18, 2015/by Matt Delaney
https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png 0 0 Matt Delaney https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png Matt Delaney2015-11-18 20:04:542018-08-14 03:35:37Article by Tim Delaney Featured on The BAM Alliance

Learning from Frank Abagnale

Articles, JDH Blog, JDH Newsletter

Catch-Me-if-You-Can-Frank-Abagnale-Dreamworks-GettyFrank W. Abagnale is one of the world’s most respected authorities on forgery, embezzlement and secure documents. For over 40 years he has worked with, advised and consulted with hundreds of financial institutions, corporations and government agencies around the world.

Mr. Abagnale’s rare blend of knowledge and expertise began more than 45 years ago when he was known as one of the world’s most famous confidence men. This was depicted most graphically in his best-selling book, Catch Me If You Can, a film of which was also made, directed by Steven Spielberg with Leonardo DiCaprio and Tom Hanks. A Broadway musical of the same title was also created and in April 2011 opened on Broadway and won a Tony Award.

While at the most recent BAM ALLIANCE National Conference, JDH Wealth Management had the opportunity to hear Frank speak. He shared his amazing life story as well as a few tips on combating fraud…

SHRED EVERYTHING: Anything that has personal information should be shredded. Use a micro-cut shredder for sensitive documents. It takes only about an hour to reassemble documents from regular shredders. Documents from cross shredders can be put back together in about 10 hours. But documents from micro-shredders are virtually impossible to put back together.

DON’T PLUG IN AN UNKNOWN FLASH DRIVE: If you find a flash drive hanging around and you don’t know where it came from, don’t plug it into a computer. Abagnale gives speeches to companies all the time, and he likes to drop flash drives in the parking lot with a label that says, “Confidential.” Someone always plugs it in. The flash drive could have a virus in it that enables someone to steal information and commit fraud.

BE CAREFUL WHAT YOU SHARE ON FACEBOOK: If a hacker gets onto your Facebook profile, they can get a lot of information. Make it a little more difficult by not giving them your birthday, where you live, and other sensitive information.

USE A CREDIT MONITORING SERVICE: Sign up for a credit monitoring service that tracks all three credit bureaus and notifies you in real time.

At JDH, security of our clients’ information is a high priority. We do many things to ensure that your information is safe with us. We also help educate our clients on things that they can be doing to protect themselves at home.

October 30, 2015/by Matt Delaney
https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png 0 0 Matt Delaney https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png Matt Delaney2015-10-30 23:58:362018-08-14 03:35:37Learning from Frank Abagnale

Avoid Water Cooler Investment Advice

Articles, JDH Blog, JDH Newsletter, Larry Swedroe

Larry Swedroe, Director of Research

LarryBenBloomberg_My book, “Investment Mistakes Even Smart Investors Make and How to Avoid Them,”covered 77 common errors I believe investors commit all too often. I know today there’s at least one more I should have included: discussing individual stock buys or sells at the water cooler.

Evidence from the field of psychology emphasizes the strength of face-to-face communication between individuals who frequently interact in producing and altering beliefs. Specifically, as it relates to investing, the study “Social Interaction and Stock Market Participation,” which appeared in the February 2004 issue of The Journal of Finance, found that social interaction leads to greater stock market participation. Read more

October 23, 2015/by Matt Delaney
https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png 0 0 Matt Delaney https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png Matt Delaney2015-10-23 22:23:392018-08-14 03:35:38Avoid Water Cooler Investment Advice

What Letterman Can Teach Investors About Financial Planning

Articles, JDH Blog, The BAM Alliance

By Kyle Veltrop

On Wednesday, May 20th, David Letterman will say goodnight to his national TV audience for a final time. It will cap a remarkable run, one spanning 32 years and more than 6,000 episodes. To last that long, of course, you have to have scores of fans, be it diehard or casual. But even if you don’t like Letterman’s sometimes acerbic style, preferred his longtime rival Jay Leno or spend your late-night hours sleeping instead of watching TV, you still can appreciate the formula for the popularity and longevity of Letterman’s show: develop a good plan, stick to it.

Sure, part of the reason for the show’s success was its A-plus guest list — Bill Clinton, Adam Sandler, Julia Roberts, George Clooney, Howard Stern and Oprah Winfrey all stopped by last week alone to say goodbye to Dave. But what mainly kept viewers coming back — night after night, year after year — were the offbeat, quirky old-reliables embroidered in the show’s fabric. Read more

May 19, 2015/by Matt Delaney
https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png 0 0 Matt Delaney https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png Matt Delaney2015-05-19 23:37:102018-08-14 03:35:38What Letterman Can Teach Investors About Financial Planning

“The One-Page Financial Plan”: Simple, But Not Simplistic

Articles, JDH Blog, Tim Maurer

onepagefinancialplan

Simple is hot, even fashionable. But in many cases, it’s for all the wrong reasons. Simple is easier to pitch, explain and sell, and therefore also easier to receive, understand and buy. But when simple devolves into simplistic, becoming a one-dimensional end instead of a user-friendly means, it’s no longer an advantage and may actually be doing damage. Not everything can be turned into a tagline, a rule of thumb or a short cut.

Therefore, when my colleague and New York Times contributor Carl Richards first asked me a couple years ago to think about what a financial plan might look like if it was constrained to a single page, I was skeptical. After all, I’d dedicated my life and work to helping people, primarily in their dealings with money, wholly through the written and spoken word. The fullness of that education seemed impossible to responsibly confine to a single page. Then I read Carl’s new book, The One-Page Financial Plan. Read more

April 22, 2015/by Matt Delaney
https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png 0 0 Matt Delaney https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png Matt Delaney2015-04-22 19:11:092018-08-14 03:35:38“The One-Page Financial Plan”: Simple, But Not Simplistic

Carl Richards on Diversification Keeping You Sane

Articles, Carl Richards, JDH Blog

Diversification Is the Sane Alternative to Betting Big on One Investment

Carl Richards, Director of Investor Education
031615bucks-carl-sketch-master675

You made a huge mistake last year with your money. You know this now, right? The only investments in your portfolio that did very well were probably United States stocks. Bonds may have held their own, but everything else was just pitiful. International stocks performed horribly and emerging markets weren’t much better.

What were you thinking? Clearly you missed a big opportunity in 2014. You should have skipped diversifying and gone all in on United States stocks. Read more

April 14, 2015/by Matt Delaney
https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png 0 0 Matt Delaney https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png Matt Delaney2015-04-14 23:03:482018-08-14 03:35:38Carl Richards on Diversification Keeping You Sane

Three Ways to Write Your Own Story, Like Baseball’s Daniel Norris

Articles, JDH Blog, Tim Maurer

DanielNorris6

[On March 26th], a bearded 21-year-old surfer who lives in a 1978 VW bus, and on a self-imposed annual allowance of $10,000, mowed down my beloved Orioles with a 96-mile-per-hour fastball.

Blue Jays pitcher Daniel Norris isn’t striving to make a statement with his apparently Spartan existence. He’s simply choosing to live life according to his priorities. He’s writing his own story.

According to ESPN, Norris’ values system is strengthened by generational ties and rooted in the topography of Johnson City in northeast Tennessee: “Play outdoors. Love the earth. Live simply. Use only what you need.” Read more

April 14, 2015/by Matt Delaney
https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png 0 0 Matt Delaney https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png Matt Delaney2015-04-14 19:21:192018-08-14 03:35:38Three Ways to Write Your Own Story, Like Baseball’s Daniel Norris

Swedroe: Take A Quiz On Who Said What

Articles, JDH Blog, Larry Swedroe

An overwhelming amount of evidence exists to clearly demonstrate that, in aggregate, active management is a loser’s game. And this is true regardless of whether markets are efficient or inefficient, or whether they are in a bull or bear phase.

But if the evidence doesn’t convince you, perhaps some of the market’s smartest and most-well-respected investors will. What’s more, you just may be surprised about who thinks what when it comes to indexing and passive management. Take the following quiz, and see if you can match the quote below to the person who said it. Read more

March 24, 2015/by Matt Delaney
https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png 0 0 Matt Delaney https://jdhwealth.com/redesign/wp-content/uploads/2018/06/JDH-Logo-Square-Color-Transparent-RGB-1.png Matt Delaney2015-03-24 16:10:422018-08-14 03:35:38Swedroe: Take A Quiz On Who Said What
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