Author Topic: Tax loss harvesting to offset unexpected gapital gains in 2017.  (Read 1769 times)

Alex356

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Tax loss harvesting to offset unexpected gapital gains in 2017.
« on: January 10, 2017, 06:04:08 PM »
Hello everyone,

I've always been trying to invest tax-efficiently.
However, I'll be forced to take a large (mostly short-term) capital gain in 2017 as one of my stocks may go private. My marginal tax bracket is high (not retired yet). Looking into two TLH options:

1. Automated - Put proceeds into Betterment or WealthFront. Get out by Dec 2017.

2. Manual - buy a random portfolio of 30-50 S&P 500 stocks with the proceeds. Statistically it will likely perform about the same as index. Sell/replace losers while harvesting losses.

While I would consider myself an experienced investor, I haven't tried any of those strategies.
What would you suggest to do? Are there any better options?

P.S. I enjoy being in control of my portfolio and avoiding extra fees, but I am not by any stretch a day trader.

Thanks in advance!
Alex

Phenix

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Re: Tax loss harvesting to offset unexpected gapital gains in 2017.
« Reply #1 on: January 11, 2017, 08:38:57 AM »
What are your estimated STCGs and what will the tax hit be?
If we're talking about a small amount like $100, I would just pay it.  If we're looking at several thousand dollars, it might make more sense to look more into a TLH strategy.

ZiziPB

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Re: Tax loss harvesting to offset unexpected gapital gains in 2017.
« Reply #2 on: January 11, 2017, 02:43:38 PM »
Do you have anything in your portfolio right now that would allow you to realize a loss?  Any bond funds?

Alex356

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Re: Tax loss harvesting to offset unexpected gapital gains in 2017.
« Reply #3 on: January 11, 2017, 05:59:42 PM »
All my current positions are positive -  bull market. No bonds in taxable accounts.

Forced short term capital gains will be in $50K-$60K range.

This is somewhat similar to a lottery winning - got lucky, then got hit by taxes.
Glad I have the entire 2017 to do something.
« Last Edit: January 11, 2017, 06:09:12 PM by Alex356 »

Alex356

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Re: Tax loss harvesting to offset unexpected gapital gains in 2017.
« Reply #4 on: January 13, 2017, 01:56:18 PM »
bumping my question in case someone has any thoughts.

Essentially, my goal is to produce up to $50-$60K of capital losses in 2017 to offset those unexpected gains.

Would a random 30-50 S&P 500 stocks portfolio  (while selling /replacing losers a few times throughout 2017) be a better option than Betterment/Wealthfront for Tax loss harvesting?

Any other ideas?

Huskie87

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Re: Tax loss harvesting to offset unexpected gapital gains in 2017.
« Reply #5 on: January 13, 2017, 02:09:38 PM »
I'd need to know the capital being invested to be able to answer this.  If you have $100,000, the only way you're generating those types of capital losses is if the market tanks.  I suspect that this is the type of money we're talking about, since you've sort of won the lotto as you said.  If we're talking about generating $60k in losses off investing $1.5M in cash, that's a different story.

I'm inclined to think that this is a situation in which you just have to pay the taxes and do it with a smile on your face.  Buying 30-50 individual stocks and trying to tax loss harvest will force you to essentially time the market on all of these stocks.  Say you buy AT&T as one of your stocks.  When will you sell to harvest losses?  At a 5% decline, 20%, 50%?  Will you be able to pull the trigger or will you think 'maybe it'll decline more' and wait?

Also, I think you might then be inclined to invest in riskier stocks, in an attempt to capture losses off that volatility.  Here I think you'd be missing the forest for the trees and could potentially invest your way out of those profits.

Finally, private MLPs are essentially built for this reason.  You get tax benefits up front to offset gains.  I would really caution you on using these, as advisors get crazy sales commissions on these and they are very risky.

Alex356

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Re: Tax loss harvesting to offset unexpected gapital gains in 2017.
« Reply #6 on: January 13, 2017, 02:50:11 PM »
Thanks!

With the proceeds and other sources I could probably accumulate up to $200,000 cash for this task throughout 2017.

For Tax Loss harvesting, I was thinking about trying to split $200,000 into, say, 40 random S&P stocks ($5000 each) and waiting on the market volatility to differentiate between them. Then, If AT&T tanks, as in your example, I can sell AT&T and buy something similar (Verizon) and later swap back to AT&T.

This is how I see it:
- There's little extra risk in selecting random 40 S&P 500 stocks on a quiet day vs buying a plain S&P 500 index. My trading costs are zero.
- There are risks in stock replacements (AT&T is not the same as Verizon) and timing of them. I am trying to estimate whether tax gains are worth those risks.
- It's hard to generate $50K losses out of $200K cash.  But even $10-$20K extra losses will help.

Please let me know where I might be wrong and whether there are better options.


Alex356

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Re: Tax loss harvesting to offset unexpected gapital gains in 2017.
« Reply #7 on: January 13, 2017, 02:51:19 PM »
Thanks!

With the proceeds and other sources I could probably accumulate up to $200,000 cash for this task throughout 2017.

For Tax Loss harvesting, I was thinking about trying to split $200,000 into, say, 40 random S&P stocks (investing according to their weight in the index) and waiting on the market volatility to differentiate between them. Then, If AT&T tanks, as in your example, I can sell AT&T and buy something similar (Verizon) and later swap back to AT&T.

This is how I see it:
- There's little extra risk in selecting random 40 S&P 500 stocks on a quiet day vs buying a plain S&P 500 index. My trading costs are zero up to 100 trades a month.
- There are risks in stock replacements (AT&T is not the same as Verizon) and timing of them. I am trying to estimate whether increased tax efficiency is worth those risks.
- It's hard to generate $50K losses out of $200K cash.  But even $10-$20K extra losses will help.

Please let me know where I might be wrong and whether there are better options.

P.S. My overall marginal tax is in 40-50% range.
« Last Edit: January 13, 2017, 02:55:53 PM by Alex356 »