Tax Loss Harvesting

Well, it is that time of year.  While many are thinking about turkey, pumpkin pie, stockings hung by the chimney with care and all that jazz, it is the time of year that I look at tax loss harvesting.

Tax loss harvesting can be done several different ways.  But before we get there, what is it and why would you need to do it?

For those who are still earning a decent income, any short held sales that have capital gains are taxed out at ordinary income levels.  Stocks (I am keeping it simple) held less than a year fall under this short term holding rule.  Lets use for an example someone taxed at the top income bracket, 39.6% for the feds.  If they had a $50,000 short term gain, they would instantly lose $19,800 of that gain to the taxman.  Ouch.

This same person, if the holding is held for more than a year loses $10,000 on the $50,000 gain.  You can see from this math that 20% is the capital gains tax on long term capital gains for top income earners.  Still ouch, but not as bad.

I have sectors in my portfolio where I hire a manager who runs part of my money.  I typically do this in sectors where I want to invest to be diverse, but don’t know anything about.  International is one sector.  These guys are paid to beat benchmarks, not worry about tax gains.  And most of the time, the gains are short term.

To offset any of these gains, I need to look at the portion of the portfolio that I control to see if I can take some tax losses.

As I mentioned earlier, there are few different ways to do this.  You can simply look at a holding if it is down, sigh, sell, and take the loss.  These losses then offset the gains you had elsewhere (I am simplifying but this post can’t be fifteen thousand words).  I don’t typically do this as there are reasons I have holdings and most are long term.

Another thing you can do is sell the holding, and then buy it back.  BUT BE CAREFUL.  There is a 30 day “wash rule”.  So if you are taking a bath on WMT for instance, you can’t sell it and buy it right back that same day and receive the tax loss.  You have to wait 30 days.  This entails a bit of gambling, as you don’t want the holding to skyrocket in the meantime.

I prefer to sell a holding and purchase a different holding in the same sector.  While the Walmart example above isn’t a great one for this, here is one that I just did.

I took a bath on BCX this year, a commodity/energy closed end fund.  When it came to mid November, I carefully checked the ex-dividend date (I always want to make sure I get a payment if I can), sold BCX and then simply purchased a different energy based closed end fund.  That way I am still fully invested in the sector, and have received the tax loss to apply where needed.  In this case, I chose NTG.  While it isn’t the same as BCX, I am big on gas and the timing was right.  It is still an energy sector play and that was good enough for me to not knock out my allocation model.

This same exact strategy can be done with stocks.  As in the WMT example above, if you are high on retail, you can buy TGT, or any of the others in the space.  And if you get a month out (outside of the wash rule) and things aren’t looking the way you want, you can sell back the TGT and re-buy WMT, and get the tax loss and be on your way.  But again, you are gambling just a bit with price, although a month is a drop in the bucket if you are an investor and not a trader.

Portfolio Six After 2015 Purchases and Sales


Attached is an update for Portfolio 6 after fall purchases and sales.  New stocks include Union Pacific (UNP), Tata Motors (TTM) and ConocoPhillips (COP).  Returns do not include the impact of dividends so they are understated.

Portfolio Five After 2015 Purchases and Sales

Screen Shot 2015-11-21 at 9.43.53 AM

Attached is an updated view of Portfolio Five after 2015 purchases and sales.  New stocks include ConocoPhillips (COP), Tata Motors (TTM), and Union Pacific Corporation (UNP).  Returns only include stock price rises and decreases not dividends (so dividend paying stocks are understated).

Portfolio Four After 2015 Purchases and Sales

Portfolio Four With 2015 Purchases and Sales

Attached is a screen shot from Google Finance of Portfolio Four after 2015 purchases and sales.  New stocks include Box (BOX), Novartis (NVS), and Tata Motors (TTM).  Returns are only based on stock prices and do not include dividends (the dividend payers have higher returns).

Portfolio Three After 2015 Purchases and Sales


Attached is a screen shot from Google Finance of Portfolio Three after stock sales and purchases for 2015.  New stocks are Alibaba (BABA), ConocoPhillips (COP), and Facebook (FB).  The returns by stock represent stock price appreciation not dividends so dividend stocks have a higher return than listed.

Portfolio One After 2015 Stock Purchases and Sales


Attached is a screen shot from Google Finance for Portfolio One after the purchases and sales from Fall, 2015.  New purchases are Tesla (TSLA), Tata Motors (TTM), Novartis (NVS) and Box (BOX).  The remaining cash also is updated.  The % return by stock does not include dividends (only “raw” stock price appreciation or depreciation), so dividend payers have a higher return than is listed.

Stock Selections for 2015

Attached are the stock selections for 2015.  We are expanding the list slightly because most of the funds not only have new cash to invest for 2015 but we also did a recent round of selling that needs to be re-invested.

US Stocks

  1. Box (BOX) – $13, 52 week range $11-$24, $1.5B market cap, no dividend, little debt.  Box provides a cloud-based document storage and governance capability and is growing rapidly among Fortune 500 corporations
  2. Mastercard (MA) – $101, 52 week range $75-$101, $114B market cap, 0.7% yield, $1.5B debt.  Mastercard is a global credit card brand that benefits from the long-term migration of cash and checks to credit.  Their biggest competitor, Visa, recently announced a merger with Visa Europe which likely will distract that company for several years and give Mastercard an opportunity to pick up market share
  3. ConocoPhillips (COP) – $55, 52 week range $41-$74, $68B market cap, 6% yield, $25B debt.  ConocoPhillips is an oil and gas exploration company that is a major bet on future price rises for natural gas and oil with technical knowhow and efficient production.  They recently made major cuts in response to the commodity price collapse
  4. Union Pacific (UNP) – $86, 52 week range $79-$124, $73B market cap, 2.6% yield, $13B debt.  Union Pacific operates a massive US rail network and has been hit recently by reductions in the industrial and commodity economies.  However, they are highly efficient and represent a solid long term bet on industrial growth and recovery

Foreign Stocks

  1. Tata Motors (TTM) – $30, 52 week range $21-$51, $19B market cap, no dividend, $11B.  Tata Motors is an Indian based company that benefits from low costs and growth in the Indian car market and also owns Jaguar and Land Rover.  The stock will be down a bit early next week because they just released earnings and showed an unexpected loss due to a one time event
  2. China Eastern Airlines (CEA) – $30, 52 week range $20-$50, $8B market cap, no dividend, $6B debt.  China Eastern Airlines can benefit from the growth in outbound Chinese tourism and investment as well as potential government mandated consolidation in the airlines sector which could result in higher profits and reduced competition
  3. Alibaba (BABA) – $83, 52 week range $57-$120, $207B market cap, no dividend, $8B debt.  Alibaba is a major web commerce / mobile player in China.  Much of Yahoo’s value was based on an ownership stake in this entity (we recently sold off Yahoo)
  4. Novartis (NVS) – $89, 52 week range $88-$106, $214B market cap, 2.7% yield, $22B debt.  Novartis is a major Swiss based drug maker


This is a new section.  These are some riskier stocks either because of high prices or uncertain outcomes.

  1. Tesla (TSLA) – $232, 52 week range $181-$286, $30B market cap, no dividend, $2.6B debt.  Tesla is a maker of electric cars led by the charismatic Elon Musk.  Their valuation is very high considering that they lose money, gas prices are low which reduces the savings from electricity, and they deliver a fraction of the cars that a “major” automotive giant would.  On the other hand, their fan base is passionate and their design is praised
  2. Facebook (FB) – $107, 52 week range $72-$110, $301B market cap, no dividend, little debt.  Facebook is the ubiquitous social media presence with a huge and growing global and mobile footprint and messaging.  Their market cap has almost tripled since their IPO and are led by the charismatic Mark Zuckerberg
  3. Cheniere (LNG) – $46, 52 week range $43-$82, $11B market cap, no dividend, $16B debt.  Cheniere is a long term bet on liquified natural gas, which takes (relatively) cheap US gas and ships it to offshore countries seeking clean energy and diversified energy sources.  This is a risky but possible bet because the facilities are mostly built but yet to ship gas and prices are falling, but the long term upside is also large if they can survive and prosper

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