Here is why I’m selling some of my stocks and how my investing strategy is changing. ENJOY! Sign up to Morning Brew today for FREE: https://cen.yt/mbgraham8 -Add me on Instagram: GPStephan
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The reason I’m selling…is because of a term called Tax Loss Harvesting.
This is a tax reduction strategy that allows you to SELL non-performing stocks that have LOST money, to then OFFSET the tax you WOULD owe on the stocks that MADE you money…and if that sounds confusing, here’s an quick example:
Let’s say you bought 2 stocks on January 1st, one of them is NOW UP $10,000 in profit and the other one LOST $10,000 in value. Well, ORDINARILY, if you were to sell that first stock for a $10,000 profit – you would have to pay taxes on that profit, which could be anywhere from 10-50%, depending on your tax bracket. BUT…according to the IRS, you can OFFSET that profit by selling ANOTHER stock at a loss….and if you structure it correctly, that loss would ENTIRELY wipe out the tax you would pay on that gain.
This means that I would be in a STRONG position to sell ALL of my losing stock market positions by the end of the year, and then – I can use that “LOSS” to offset my profits on the stocks I sell for a GAIN. Now, ORDINARILY – I would hold off from selling stocks – but, in this case, there’s ZERO downside not to sell a portion of my best performing stocks – and then, I can sell the losers to offset that loss so that I won’t owe any short term capital gains tax on my profit. At the very least, I was able to raise my tax basis so that I’ll owe less in the future – and, at the very most, I’ve just made a “tax free profit.”
This is an INCREDIBLY common tax strategy that A LOT of investors utilize at the end of each year, and if YOU have losing positions that could potentially offset your profits – then it’s WORTH IT to structure these in such a way to reduce your taxable gain.
IN ADDITION TO THAT…if your capital losses exceed your total profit…meaning, you’ve lost more than you’ve made…then, that remaining amount can be deducted off your earned income, up to $3000 per year, and any amount ABOVE that can be carried forward into future years. So, lets just say you browsed wallstreetbets…went too heavy into GameStop…and now, you have a $6000 loss. Well, even if you have NO OTHER investment profits…you can reduce your taxable income by $3000 in the first year, and $3000 again the second year until your loss is completely deducted 100%.
HOWEVER…there are a few rules when it comes to this, and a few VERY important pitfalls you NEED to avoid if you do this correctly:
The most well known is what’s called a “WASH SALE.” This is when you sell a stock for a loss, use that loss to offset your tax, and then IMMEDIATELY go in and buy the exact same stock YOU JUST SOLD within a 30-days window. The IRS does NOT allow that, because otherwise – EVERYONE would sell their losing stocks as soon as they could, and then just continually buy back in…so, you can’t do that.
HOWEVER…there’s NOTHING that says you can’t go and buy a DIFFERENT stock immediately after.
The SECOND rule is that the TYPE of stock loss will FIRST offset that same TYPE of stock profit…I know that made no sense, but I was trying to think of ways to explain it…so here’s an example:
If you have a SHORT TERM LOSS On a stock you held for less than a year…that “tax deduction” will FIRST be applied to all the PROFITS you made from stocks you held for less than a year….ad then, anything remaining will offset your LONG TERM CAPITAL GAINS.
And besides selling off the losers and then making sure I have an equivalent amount of profit to offset – everything else is relatively staying the exact same.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com
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