Tax-loss harvesting—lemonade in a lemon-filled market?

Source: Tenor

Yes, it’s been a brutal few weeks in the market. We’ve all had our butts kicked.  

But that’s old news, and it’s not super useful to keep re-visiting it. 

So, what should a smart investor do during these times? Buy? Sell? Both?  

For some of you, the answer may be “Both”. 

We’re not going to tell you what to do or not to do, because everybody’s situation is unique. But if the market is serving you lemons… well, you know the rest.  

If you’re looking for some lemons to squeeze without negatively impacting your overall long-term commitment to the market, you might consider tax- loss harvesting for some of your positions.  

(If you’re not familiar with tax-loss harvesting, check out this helpful article).

In very basic terms, tax-loss harvesting is selling security positions that have fallen in value to realize losses in order to offset taxable gains from other security sales and/or taxes due on a limited amount of ordinary income. One important note: In order to lock in these potential tax benefits, you can’t buy back those same securities (or ones that are “substantially similar”) for a period of 30 days. If you buy back before the 30 days are over, your tax benefit is disallowed under the “wash sale” rule.  

So how might this work to your benefit? 

Let’s say you own a position in Company A, and its value has tanked over the last three weeks. You don’t think it’s going to recover in the next 30 days, or you have other realized gains you’d rather not pay taxes on.  

So, you’re considering selling Company A.  

But you’re also a buy-and-hold investor, you want to stay in the market, and you still like Company A’s long-term prospects. In fact, you’d buy back the company’s shares immediately if you didn’t have to worry about the wash sale rule. Here are a couple of options to consider if you decide to sell: 

  1. Immediately put your proceeds into Company A’s top competitor (or a Pie of multiple competitors); or 
  1. You could buy an ETF that’s focused in Company A’s industry 

Once you ride out your 30 days with your new position(s), your tax-loss would be properly harvested and you could reverse your positions and get back into Company A, if you still wanted to do so. 

Now, with everything in life, investing and lemonade making, there are always risks to account for. In the example above, Company A’s stock price could appreciate rapidly over the 30 days and you’d miss out on that. Additionally, the buying and selling of competitors and/or ETFs could trigger short-term gains or losses that could negatively impact your portfolio or tax situation.  

It’s important to note that at M1, we do not do tax-loss harvesting for you. This is a feature that has been requested by some of you, but we haven’t made available. Why?  Because tax-loss harvesting is an investment advisory feature and M1 is a self-directed platform, so unless you edit your Pie and hit that “confirm” button, we won’t buy or sell any securities for you.  

In any case, hang in there during these times, people. Hopefully we’ll be drinking something more exciting than lemonade in the not-too-distant future.  

For more information on this and other related topics, visit 

Publication 550 – Investment Income and Expenses (Including Capital Gains and Losses)  

Topic No. 409 Capital Gains and Losses  

Publication 551 (12/2018), Basis of Assets  

M1 does not provide tax advice, and we suggest you consult a tax expert on any matters related to taxes on your investments. 

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