Making money in stocks means owing taxes. Gains on profitable investments are taxed based on the length of ownership. If your holding period exceeds one year, the gains are considered “long term” and at taxed at 20%. “Short term” gains on positions held less than one year are taxed at your marginal income tax rate, which could be as high as 39.6%. The idea is to encourage a longer-term investing over short-term trading.

 

We consider the tax implications every time we sell a stock. However, we generally just think of taxes as an annoying side effect of successful portfolio management. In other words, our decision to sell a stock is based on fundamental analysis of the company and each client’s account structure, not the tax impact. Certain strategies can reduce or eliminate gains and therefore reduce taxes. We utilize these strategies throughout the year to minimize gains for each household.

 

 

  1. Mind the holding period:  If the position has been owned almost 365 days, we try to wait until the gain is considered long term before selling.
  2. Harvest losses where prudent:  We look for opportunities to sell losers to offset realized capital gains from winners. This works particularly well if we can swap into a different but similar stock that also fits the portfolio. Not all losses are worth harvesting.
  3. Buy more:  If we really like our thesis on a stock, but the loss would help reduce taxes, we can add to the position, wait 30 days, then sell the original higher cost shares to realize the loss. The client gets the benefit of realizing the loss on the original position but maintains the position in the stock. “Wash sale” rules disqualify the loss if it’s sold before the new lot is held for 30 days.
  4. Delay it:  If we’re nearing the end of the year and have done all we can to reduce a client’s realized capital gains, we try to delay any additional tax by waiting until the new tax year to sell.
  5. (Another option) Give it:  Often the most cost-effective way to fulfill a charitable pledge is to give appreciated stock. You deduct the contribution and avoid paying taxes on the gain that would have been owed when eventually sold.
We usually view taxes as the inevitable result of a good investment, but there are things we can do to lessen the burden. Between now and year-end, we’ll consistently be looking for opportunities to utilize these strategies.