What Is Tax Loss Harvesting?

The Juice remains bullish on stocks. We’ve been calling for a Santa Claus rally to end 2023 and a strong stock market into 2024, irrespective of any presidential election uncertainty. 

As the economy appears to be landing softly (What is a soft landing?, you ask?), our game plan is to: 

• Continue to invest in the leaders, particularly tech leaders. 
• Give dividend-paying stocks a look, especially if you’re a long-term investor. 

Sounds fantastic! 

However, there’s a better-than-zero chance you’re holding some losers here at the end of 2023. 

The five stocks generating the most search interest among financial professionals of late in our Trackstar database represent a who’s who of the year’s winning and losing stocks. 

Check out these (approximate) YTD gains … and losses: 

• Nvidia (NVDA): plus 243%
• Apple (AAPL): plus 58%
• AMC Entertainment (AMC): minus 78% 
• Tesla (TSLA): plus 132%
• Canopy Growth Corp (CGC): minus 77%

Let’s say you invested $1,000 in each of these five stocks at the beginning of the year. Convenient for illustrative purposes, but not completely crazy to think you viewed: 

• Nvidia, Apple and Tesla as solid, long-term plays or, merely, 2023 plays. 
• AMC and Canopy Growth as speculative plays around meme status or some level of conviction. 

Today — not factoring in Apple’s dividend — you’d be sitting on the following short-term capital gains and losses. Short-term because you bought each stock less than a year ago, meaning any gains will be taxed at the higher ordinary income tax rates, not lower long-term capital gain rates on positions held for more than a year.

• Nvidia: Gain of $2,431
• Apple: Gain of $579
• AMC: Loss of $780
• Tesla: Gain of $1,326
• Canopy: Loss of $771

Not a bad year really. Without doing anything you have — in total — an unrealized short-term capital gain of $2,785. A roughly 55% return on your $5,000 investment. 

You want to hold Apple and Tesla, but you can’t resist taking profits on Nvidia. So you sell NVDA and realize the $2,431 short-term capital gain. You’re not a fan of taking the tax hit, particularly at your income tax rate, so you decide to employ tax loss harvesting to help offset this taxable gain. 

Here’s how it works. 

You could sell one or more of your losers and use the capital losses to offset up to $3,000 of your ordinary taxable income. If you sold both AMC and CGC, you realize a capital loss of $1,551. You would be able to subtract that amount from your NVDA sale and only pay income tax (short-term capital gains tax) on $880 of your NVDA profits. 

If you exceed $3,000, you can carry over the excess amounts to offset income in future years. 

A few things to be aware of: 

• If you get cute and purchase the same or a “substantially identical” security within 30 days before or after the sale where you claimed a capital loss, you might trigger the IRS’s wash sale rule, which would prevent you from using the loss to offset your capital gains as discussed here. 
• In this case, it simply means buying, say, AMC again because you wanted to get back in at an attractive price (or whatever). 
• Also, short-term losses are first applied to offset short-term gains and long-term losses are first applied to offset long-term gains. Excess losses in one area can then be applied to another. 
• This doesn’t fly in retirement accounts given their tax-deferred status. As we have noted, The Juice has plans to focus on retirement in the coming weeks and months so we’ll hit the key tax aspects of retirement accounts such as IRAs and 401(k)s. 

The Bottom Line: While tax loss harvesting doesn’t always make sense, it can when you’re holding stocks you think have become a lost cause. Down nearly 80% or so YTD, AMC and CGC are good lost cause candidates. 

You can always hang onto your winners and claim your capital losses, up to $3,000, to offset your taxable income. But, if you’d like to take profits, you can ease the brunt of your tax bill, by selling losers and doing a little year-end tax loss harvesting.

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