When an investment loss has a silver lining

Silver linings and investment losses aren’t generally heard in the same sentence.

There is one circumstance when an investment loss can be beneficial.

Well, actually a couple of times.  The first could be when you were planning on investing money anyway and the price of the investment happened to go down in price.

Let’s say you were thinking of buying 100 shares of a stock¹ tomorrow and the price closed at $400 a share today.

When you turn on the news, you see the price was now sitting at $350 based on a weak earnings report or flat sales for the quarter.

You still like  stock and now purchase 100 shares at $350 a share.  This price drop saved you $5,000 from the previous market close.

This first example is more based on luck, versus a strategy.

The second example is all about tax savings.  It is called Tax Loss Harvesting.

It works like this, and it can help take advantage of a declining investment. 

Let’s say on January 15th you purchased a stock at $400 a share and then 12 months later, the price of that stock was sitting at $350 a share.

This equates to a $50 loss per share or a $5,000 loss overall.

If you held these shares for at least 12 months, you could sell these 100 shares and realize the $5,000 loss.

It looks like this:

• January 15th 2022 you purchase 100 shares of a stock at $400 a share
• Total investment was $40,000 (this assumes no cost to buy)
• On January 18th 2023, you sold these 100 shares of the stock at $350 a share
• You realize a long-term loss of $5,000 ($400 - $350 = $50 x 100 shares = $5,000)

One key thing to remember is, that you must have purchased these shares in a non-retirement account.   Tax losses cannot be realized in a retirement account such as an IRA, 401k etc.

But, you might be asking, what if I still like the stock and want to own it for a long time?

In this example, the tax laws don’t allow you to take this loss and then just buy the shares right back.   Doing so would be subject to the Wash Sale rules.

This rule states that one can’t sell the shares, take the loss, and buy the same investment (or a substantially similar security) within 30 days.

The tax law isn’t super clear on the definition of a substantially similar security, but one can definitely not buy the same security².

You couldn’t sell the stock and buy it back within 30 days without being in violation of the Wash Sale Rule.

You could, however, sell the stock and buy a different stock for example less than 30 days later.  Or sell the stock and buy a mutual fund or Exchange Traded Fund (ETF) that hold this stock along with other companies.

You also can’t sell the stock (mutual fund or ETF), take the loss and in less than 30 days buy the same security in your spouse’s account. And lastly, you can’t sell these shares in your non-retirement account and within 30 days buy them in your retirement account (Like an IRA) and claim the loss.

How can you use these losses?

The IRS allows one to offset these gains from losses.  If you had a long-term gain in stock XYZ of $10,000 and a long term loss of $10,000 in stock ABC, they would actually wipe each other out and you would have zero gains and zero loses.

What if I don’t have any gains to offset these losses?

Well, you can offset up to $3,000 of losses from your ordinary income.  

What if I have $30,000 of losses.  What happens to the remaining $27,000?  ($30,000 - $3,000 = $27,000)

The law allows one to carry forward $3,000 of losses each year to help offset ordinary income.  (In a year where you have another large capital gain, you can use up some of those “carry forward losses” against those capital gains.)

What if I bought a stock (in this example) several times like:

2019 – 100 shares at $300

2020 -  200 shares at $350

2021 -  100 shares at $400

If the stock drops to $360, could I sell the 100 shares I bought at $400 and take the long-term loss of $40 a share?

Yes, however, it may not be automatic, so it is always best to work with a Certified Financial Planner® Practitioner or your CPA before selling an investment or utilizing tax strategies.

When one has many different lots of stock bought at different prices, it can be beneficial to first look at your actual cost for these different lots.  This could help determine which shares could be used for tax losses and even which shares are best to gift to a charity or to children.

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In good health.

All the best.

Rick Fingerman, CFP®, CDFA®, CCPS®

Rick@PlanWithFPS.com

617-630-4978

*This blog article is meant to be just a simple primer. I'm happy to speak in more detail one on one. 

1. This is only an example. This piece is not recommending any one company but rather just using various companies as examples.  All investments carry risk  of loss, and this article is not recommending the purchase or sale of any company or investment.  Always check with your investment professional before investing.

               2. The IRS might have an issue if, for example, you sold a particular S & P 500 index fund and then within 30 days bought a different S & P 500 fund. These seem pretty                         substantially similar as they hold the same 500 companies.

Nothing in this article should be construed as investment advice.  All investments carry risk of loss. Always speak with your investment professional before buying or selling a security.

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.