Tax-Loss Selling – It's Not Just for Year End Anymore

The market declines this year have been dramatic, but the weak index performance understates the damage in most individual stocks... While the large-cap S&P 500, tech-heavy Nasdaq Composite, and small-cap Russell 2000 indexes are down 18%, 26%, and 20% year to date, respectively, many individual stocks are down more... a lot more. Losses of 40%, […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Tax-Loss Selling – It's Not Just for Year End Anymore By Berna Barshay --------------------------------------------------------------- [It's all up from here for this inflation stock]( Right now, one inflation stock is catching the attention of the world's largest money manager. Get in now before it takes off. [Get full details here](. --------------------------------------------------------------- The market declines this year have been dramatic, but the weak index performance understates the damage in most individual stocks... While the large-cap S&P 500, tech-heavy Nasdaq Composite, and small-cap Russell 2000 indexes are down 18%, 26%, and 20% year to date, respectively, many individual stocks are down more... a lot more. Losses of 40%, 60%, or even 75% aren't unusual this year in single stocks, particularly in out-of-favor sectors like tech and retail. Last month, in my [Bear Market Playbook]( I shared some strategies for surviving this bear market and positioning yourself to eventually thrive when we come out of it. The first step in the "survive and thrive" process is to do a merciless portfolio review. I explained that you need to cull through all your stocks and make a bottoms-up, informed, and analytical decision about which stocks to keep and which to toss. As I wrote... Stock by stock, think about whether you really want to stick with the position. Look out for thesis drift – where you bought the stock for one reason, it didn't work, and now you made up a new reason to continue owning it. Think about the upside to downside ratio... If it's not at least 2 times, there may be more attractive opportunities out there with stocks down so much. Also, think about what catastrophic risks exist for the stock. Once you decide what you are going to toss, get out, don't look back... and let's get that money back to work in better bets. The inevitable fallout of this exercise is that you'll want to let some stocks go. There will be companies that became too risky in the current inflationary and rising rate environment. There will be stocks whose outlooks have eroded materially and could be dead money... or worse. And of course, there will be some flat-out mistakes... because no one – and I mean no one – bats a thousand in this stock-picking game. I can't emphasize enough how important it is not to hold onto stocks just to "hope to get back to even" on them, because some of them may never get there. Others will, but the process of climbing back could take a long time... and time is money. You want to redeploy your capital to stocks that will bounce back faster. Remember that when you sell losers, you'll generate tax losses... When you sell a stock for a price lower than the one you bought it at, that creates a capital loss, which in turn has tax implications. Capital losses can be used to offset capital gains – lowering your tax burden on your winners. Harvesting losses is typically something people consider in November or December. As we run down the clock on the tax year, people start thinking about how to minimize their tax bill in the coming spring. But there's no hard and fast rule that tax trading needs to happen in the fourth quarter. If you are going to be selling stocks because of changes to the macro (or micro) environment, now is a good time to start thinking about the tax implications and opportunities. There's no reason to wait for year end. --------------------------------------------------------------- Recommended Link: [Forced out of retirement like 1.5 million other Americans?]( The stock market, mixed with historical inflation, is crushing some folks' retirement dreams. 1.5 million have already unretired. And 39 million more are in jeopardy of the same fate... Don't become a statistic. Watch this video that will help you navigate these volatile markets. You'll learn a twist on a technique some people use to make $2,000 a week. Now, anyone can use it. [See how it works here](. --------------------------------------------------------------- As such, let's first review the basics of harvesting tax losses... When you sell an underperforming investment, the loss you take on the trade can be used to reduce your tax burden in one of two ways. You can use it to offset what you owe when you realize a capital gain in the same year, or you can use the capital loss to take a limited write-off against ordinary income. People often think about harvesting tax losses at the end of the year to offset the taxes they will need to pay on successful closed positions. With the market down so much recently, you likely have already realized losses – so we need to flip the script and think about harvesting gains. Imagine you had a $60,000 capital loss in a stock you decided to exit. Most investors likely won't have a stock they made $60,000 on this year, given how terrible the markets have been. But the gains don't have to have been made in the last year... And there's no shortage of stocks that are sitting on some pretty hefty gains over the last several years. Stocks like tech giant Apple (AAPL) and retailer Lululemon Athletica (LULU) have both been four-baggers over the past five years – even with big year-to-date drops. And electric-vehicle maker Tesla (TSLA) is up over 10 times in the same five-year period. If you've owned any of these popular stocks for a couple of years or more, you have big unrealized capital gains. If you're an investor for the long term, you might not be so excited about the prospect of selling any of your big winners in order to create a realized gain. That's understandable... But there's nothing to stop you from buying them right back after the capital gain is realized. If you don't have capital gains to offset your capital losses, you can of course always take your capital loss against your ordinary income... But the problem with that is you are limited to taking just $3,000 per year in capital loss write-offs against your income. Sure, you can carry forward what you don't use in a given year... But in the example I gave above where an investor took a $60,000 capital loss, it would take 20 years to get the full benefit of the capital loss when taking it just $3,000 at a time against ordinary income. That's an incredibly long time... and it exceeds the financial planning horizon for many seniors. You can also use your loss to offset gains, and then if there is loss left over, apply $3,000 of the excess to offset current ordinary income and then carry over whatever is left. In the graphic below from broker Charles Schwab (SCHW), you can see how it works... Source: Schwab.com There's no question that you get more immediate bang for the buck by netting your realized capital loss versus a realized capital gain. While your ordinary income tax rate may be far higher than the 15% or 20% long-term capital gains tax rate, it could take you decades to fully utilize that write-off versus your income. For this reason, if you have taken or plan to take a meaningful capital loss by exiting a stock that you hold in a taxable account, now is a good time to think about harvesting some gains along with those losses. When netting losses against gains, remember the wash-sale rule... and keep a calendar handy! If you're thinking about buying back any of the stocks you sold for a loss, make sure you wait more than 30 days before you come back into the stock. The only thing worse than losing a lot of money on an individual name would be taking the hit, then not getting the tax credit for it! If you buy the same stock back in less than 31 days or purchase a substantially similar security (such as a call option on that same stock), you don't get to net your loss versus your gains (or against ordinary income up to $3,000). The wash-sale rule doesn't apply to gains, though... If you harvest a capital gain by selling appreciated shares, you can buy your shares back the very next day. While you may lose the psychic pleasure of looking at those big unrealized gains in your account, you'll now have a stepped-up cost basis on those shares – reducing your future tax burden. Also remember that there's no need to match harvested gains versus harvested losses in a retirement account like a 401(k) or IRA – stocks held in those accounts are exempt from capital gains taxes. It's also worth mentioning that long-term losses are first netted against long-term gains, as short-term losses are netted first against short-term gains. But if you have mostly short-term losses and long-term gains, these can be netted against each other – it's just the short-term losses and gains are netted first. No one likes taking losses... Just like no one likes losing money. But harvesting losses and using them to offset gains in long-held winners will allow you to get a little value back from your mistakes. It's something brokers and advisors will remind us of at the end of the year... but there's no reason you have to wait until December to take full tax advantage of clearing out your duds. I received more mail than ever in response to last month's "[A Free Markets Failure That May Be Costing Lives]( a piece about how the lack of a profit opportunity is impeding research into a promising drug to treat breast cancer... Clearly, this topic struck a chord. Once you get to a certain age, it's hard to find an American whose life hasn't been affected by cancer, the frustrations and inefficiencies of the U.S. health care system, or both. The sometimes-infuriating nature of the health care system in this country feels like one of the only things that we can get to near consensus on these days. I won't be able to print all of the dozens of thoughtful letters I received... but in the coming weeks, I'll share as many as space will allow. Before I get to the first crop of letters, I want to respond to the women who wrote in saying they suffer from triple-negative breast cancer and would like to know how to get more information... I'm happy to connect you with my friend to discuss her protocol, as well as point you in the direction of a doctor who works in this area. But for my friend's privacy and to respect the doctor's time, I don't want to broadly publish their information... so please [click here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna:%20Request%20to%20Connect%20for%20Cancer%20Information) to send me an e-mail with an explicit request to be connected and I will get back to you personally with the requested information. Before I get to the letters, a reminder that you can also [click here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna) to share your thoughts and opinions on tax trading and portfolio rebalancing during a bear market. "As a boarded family physician for 35 years and a free market advocate, you have learned what I have seen regarding why some studies financially cannot be done. Here [are] a few more perspectives to consider. "The private/public interface produces mixed messaging. Years ago when I was on a statewide American Lung Association board, some members wanted to tout tobacco cessation programs as a money saver in order to lobby for antismoking laws. Turns out that people living decades longer due to never/not smoking costs the government a lot more in Social Security/Medicare. All health decisions mostly hinge on improving quality of life, but if no one can make a buck off of it, then that may be a good place for the government to step in. "You just described a good example of what I call an 'orphan drug.' You may have heard of 'orphan diseases' which are so rare that no one can afford to make a drug using the routine FDA pathway since they would sell so little of it. What we need is a regulatory pathway that allows a patent for the new Application of the old generic drug so the private sector can get a reasonable ROI, or the government just pays for the research." – David Z. Berna comment: In letters and conversations since writing the piece, it became clear to me that the situation with this off-patent copper chelation drug is not an unusual one. There are likely a lot of off-patent drugs out there that were developed for one thing but might work for something else – but we'll never know, because there is no profit motive to spend the money to find out. David, I think you hit the nail on the head that there needs to be a path for private companies to monetize new work on old drugs... otherwise too many promising roads will end in a dead end because of financing, not science. "Berna, your observations are unfortunately all too accurate. The health care system at every level has incentives in place that relate as much or more to profit and commerce than they do to health outcomes. Health care commerce and reimbursement at every level – drug discovery, health insurance, provider compensation, and hospital delivery systems – are not infrequently at odds with patients' best interests." – Scott R. "The problem with your essay is that it skips over the real issue at the heart of our Prescription Drug System. The Free Market isn't the issue. The issue is $100 million for a Phase III study. The FDA isn't looking for ways to utilize cheap drugs to save lives. They want high priced blockbuster drugs approved to keep you barely alive. It is one of the worst examples of our bureaucratic morass. Further complicating things is a horrific legal system that punishes doctors, drug companies, and of course, their customers." – Scott P. Berna comment: Scott, you bring up an important issue... You ask the question: Why do Phase III trials cost so much anyway? While I do think it makes sense to fully investigate new drugs for safety and efficacy (if in doubt, google "thalidomide"), it seems like a cheaper, faster process should be available for long-used drugs where safety is already well established, as is the case with the drug I wrote about. "You nailed it, Berna. This article is one of the best and most important I've ever read from a financial analyst. I'd like to provide others with a link to this article if you could make it available." – Bob S. Berna comment: Thank you, Bob! I do agree this is one of the most important things I have ever written. I would love if someone in the mainstream press would run with this story, so the copper depletion protocol gets more exploration and investment – and so the broader issue of off-patent drugs with promising new applications getting ignored gets more high-level attention. I'm trying to get the story out there as best I can. Regards, Berna Barshay July 27, 2022 [Learn more about how to get 40% off a year of Berna's Empire Market Insider newsletter here.]( --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](