Investment Management

Make lemonade out of lemons

This current bull market has lasted a long time. It started in March of 2009 and is still running nine years later. Markets go up and down: we all know that. Did you know there is a way you can trim your tax bill when markets go down? Perhaps not. Follow along below or ask your advisor to do this for you.

Institutional investors have long used the following technique to enhance their overall returns by working the tax code to their advantage. There is no reason you and your family can not take advantage of this same technique. What I am about to share will not work with your IRA or your 401k plan at work. It may however benefit you if you do this with your individual or joint investment account.

First the lemons:

Each year you and your Financial Advisor should be looking at your accounts for investments that have lost value, to “tax loss harvest”. You can sell the selected investments and then buy another investment with better prospects or if you need the money to spend, it will be available. This may cause the loss to be “realized” in tax terms. But there is another way to help yourself to some potentially significant tax saving. You can sell and buy back 30 days later that same investment. This is done when you and your Advisor believe the investment be a good investment that is temporarily down. Then this too may be a realized loss, in the eyes of the tax authorities.  In the interim 30 days, you may buy and own a similar proxy investment to the one you sold in order to participate in the market.  The key here is that the investment you own as a temporary replacement must not violate the “wash-sale rule”, which requires that it must not be “substantially identical” to the investment you sold.  This allows you to keep the tax loss.  In other words, you can’t keep the loss if you buy back the investment or one just like it within 30 days.

For most people, most of the time it is best to use this technique just with your long-term losses – those that you have owned for a year or more.  You should note that tax harvesting does not work with taxable gains.  If you have a capital gain, you are subject to capital gains tax assessment no matter when you bought or sold that investment.

Now the lemonade:

Early in the following year when you file your taxes you will discover the lemonade. Tax losses on long term investments can be used to offset dollar for dollar any gains on realized gains in other investments. Also, they can be used to reduce your ordinary income by up to $3,000. The tax losses that are not used up by the previously mentioned losses and income reduction can be “banked” for future years.

We at Skyline Advisors do not give tax or legal advice. We are a SEC Registered Investment Advisor firm. We work in close concert with your tax and legal advisors. We implement their advice. Sometimes we start the conversation for all parties to consider different scenarios. Hopefully this will start a conversation for you and your family.


The commentary on this website reflects the personal opinions, viewpoints and analyses of the Skyline Advisors, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Skyline Advisors, Inc. or performance returns of any Skyline Advisors, Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Skyline Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.