Tax-Loss Harvesting

Tax-loss harvesting is a strategy to lower taxes. Investments have capital gains and capital losses depending on their purchase price (cost basis) and their current value.

Tax-loss harvesting involves selling investments that have decreased in value relative to their cost basis. This creates a capital loss and allows for reallocation of capital.

Capital losses offset capital gains. Capital gains are classified as short-term if held for less than 1 year and long-term if held for more than 1 year. Short-term losses offset short-term gains and long-term losses offset long-term gains.

Capital losses can offset up to $3,000 of taxable income. Additional losses can be carried forward to offset taxable income for future years.

Author’s Note: I wrote this post in March of 2025 prior to the S&P dropping 15% and the NASDAQ dropping over 20%. This only makes tax-loss harvesting more appropriate as it applies to nearly any equity purchased in 2024 or early 2025. Anyway, enjoy!

Mildly Relevant Stock Trade:

I dabble in stock trading. Not day trading, but swing trading and some stock picking. Tax-loss harvesting allows me to exit bad positions and cash out of overextended positions.

On June 12, 2024 I purchased 33 shares of LULU (Lululemon Athletica) for $302.31 per share. Why? My trading unit is approximately $10,000 and LULU met enough of my signals to BUY. They were meeting my metrics.

  1. Good Cashflow

  2. Solid Margin Business

  3. Increasing Earnings Per Share

  4. Increasing Net Income

In early 2024, LULU was trading at $500 per share. Something about a c-suite shuffle at the company didn’t sit well with investors, so LULU dropped quickly to $330, then to $295. I bought in during this second drop for $302.31 per share.

The stock stayed oscillated around $300 per share before investors bailed in late July due to concerns of an economic slowdown leading to a 52-week low of $226. Based on the underlying fundamentals, LULU was a “HOLD” in my book.

Throughout the fall, LULU performed to investor expectations and slowly regained $320 per share.

Quarterly earnings arrived on December 5, far exceeding investor expectations. Share prices shot up to $400 per share. A bit overbought for my taste. And despite LULU performing well as a company, investor sentiment around a potential economic slowdown did me dirty in the past. Nothing in the market has to make sense, but there was probably something I was missing. Anyway…

I sold out of the position on December 9, 2024 at $413.60 per share.

LULU stock purchase

After oscillating around $395 per share for a while, share price since December dropped to $344. ‘Twas a good time to exit the trade. Better to be lucky than good.

A 25% drop followed by a 36% gain within 6 months. Could have been better, could have been worse. That’s stock trading for ya.

I have sold stocks after a gain only to see a slight pullback, then higher highs. I’m saying there is a chance I sold LULU only to see it reach $500 by mid 2025 without buying back in. Time will tell if buying at $344 is a good idea.

Post Script: Upon editing on 3/30/2025, price dropped 14% after March earnings. Price hovers around $293. This level appears to have some support. Buying back in may cross my mind.

Here is the Tax-Loss Harvesting Part:

I’m liable for taxes on the $3,672 at my marginal tax rate. Ouch! That’s why I don’t stock trade frequently. The few winners I pick are taxed to death.

If I had a losing trade, I could sell as a short-term capital loss to offset my $3,672 gain.

I’m invested in the fictitious company LOSS. It was a good idea that turned sour with share price decreasing from $300 to $200. I’ll sell my 30 shares of LOSS for a $3,000 short-term capital loss.

Now, I’m liable for taxes on my NET gain of $672 AND I can move funds from LOSS into an investment that will hopefully perform better. The combined sales freed up almost $20,000 in capital.

I have one more bad investment to sell and harvest the loss. Same deal, new fictitious ticker symbol.

I’m down another $3,000 bringing my Net short-term capital loss to $2,327. I can use this loss to offset my anesthesia income. Savings at my marginal rate.

Losses over $3,000 carry forward to offset future years. There are not many ways to offset earned income, but this is one of them.

Wash Sale Rule:

This rule prevents the sale and subsequent repurchase of a substantially identical security within 30 days for the sole purpose of tax-loss harvesting. That’s 30 days before and after.

This prevents me from seeing LULU stock decrease to $250, selling, then immediately repurchasing because I like the fundamentals. I must wait 31 days.

I could sell LULU and buy a different stock. Another apparel stock is fine. Just not LULU.

I could sell VTI, a total stock market index fund at a loss, then repurchase a different index fund such as VUG, VT, or VOO the same day. These funds are not the same. VUG is a growth fund, VT is a total stock market fund, and VOO is an S&P 500 fund. They are similar funds, but not substantially identical.

If purchasing an identical security within 30 days, you just can’t claim the loss on taxes. The loss is added to the cost basis of the substantially identical security. It will be claimed eventually, but it’s deferred until a sale that does not trigger the wash sale rule.

When to Tax-Loss Harvest:

I’ll harvest tax loss during the next market downturn. If I sell VTI, all of the sale will go into VUG immediately and vice versa. I won’t time the market, but rather alter cost basis during a market drawdown.

If you are interested in learning more about tax-loss and tax-gain harvesting (among other tax strategies), check out the course.

TFC Advice:

It’s not a requirement to harvest gains and losses. You won’t be forever broke if you don’t harvest. It’s a nuance technique to squeeze every drop from the fruit.

Don’t be a stock trader. As a casual stock trader, I use money I can afford to lose. It’s my discretionary spending.

Be a buy-and-hold investor. Hoard index funds your entire career. Only sell as a means to support your way of life in retirement.

Seriously, don’t time the market. A simple dollar-cost averaging approach is amazing. When investors attempt to time the market, self-managed portfolios return around 2% annually over a career. If you really want to outperform your financial advisor, buy and hold.

Thanks for reading.

L. Murren

CRNA and author of The Financial Cocktail.

https://Thefinancialcocktail.com
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