7 ms·

TLDR - by using tax loss harvesting . At the end of the year, sell your stocks which are down and then buy them back. Then you can use the losses to offset the

TLDR - by using tax loss harvesting . At the end of the year, sell your stocks which are down and then buy them back. Then you can use the losses to offset the gains. Although this is also available to masses .

chii 4y ago
In some jurisdictions (such as Australia), this is called a wash sale, and is illegal.
- ojbyrne 4y ago
  The entire article is about wash sales, basically describing ways to circumvent the rules.
- merek 4y ago
  The IRS will also reject the reported loss if it qualifies as a wash sale. > You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities. https://www.irs.gov/pub/irs-pdf/p550.pdf https://www.irs.gov/pub/irs-pdf/p550.pdf
klyrs 4y ago
> Although this is also available to masses . Not in any meaningful sense. Only the ultra-wealthy can wipe out the lion's share of their tax bill through this loophole. From the article: > Someone like Ballmer can easily deploy $100 million in losses to cancel out a $100 million gain from selling some of his vast Microsoft holdings. It’s a very different story when it comes to wages and other forms of income, of which only $3,000 can be offset. On average, only the top 0.001% of taxpayers made a majority of their income through investment gains in 2018, according to public IRS data.
- missedthecue 4y ago
  If he's eating $100 million in losses in one investment and gaining $100 million in another, he's not any richer at the end of the year. I'm not sure what the outrage is. But like you say you can only deduct $3000 of capital losses per year. Completely and entirely immaterial to a billionaire like Ballmer, but very valuable to someone in the middle class or lower.
  - dataflow 4y ago
    > you can only deduct $3000 of capital losses per year Edit: I thought that limit is just for your ordinary income but there seems to be disagreement on this?
    - deleted 4y ago
      [deleted]
    - ctchocula 4y ago
      You are correct and missedthecue is incorrect. IRS laws say you can deduct $3000 ordinary income (i.e. income earned by working, so doesn't include capital gains) per year and deduct without limit against capital gains. Should your capital losses exceed your capital gains that year, you can carryforward the rest of the capital losses without limit onto the next year 2023, 2024, etc. The whole point of the article is that "tax loss harvesting" beneficial to Steve Ballmer and the other billionaires mentioned in the article, because they have $Bs in capital gains to begin with (Steve Ballmer had highly appreciated MSFT stock as mentioned in the article). An average Joe like you and me even if we have that much capital losses would find it difficult to find the capital gains to deduct against, so we're typically limited to only $3000 per year deducting against ordinary income (compare against no limit for capital gains), which is much less useful tax shield compared to someone like Steve Ballmer who gets most of his income from capital gains, and who therefore can use his massive cap losses to shield against taxation much more effectively. This is the part that makes "Although this is also available to masses" somewhat moot. Even though it's "technically" possible, the masses don't have the massive capital gains to actually deduct against, so they don't benefit from this to nearly the same magnitude as someone who draws most of their income from capital appreciation. Therefore, one could argue that this section of the tax code is "unfair" in year 2023. The article makes the case that wash sale rule was effective in the 1920s, but that in the 100 years that have passed, technology has made evading the wash sale rule trivial (especially for billionaires), so the rule as drafted in the 1900s is no longer effective at preventing what it intended. Source: https://www.irs.gov/taxtopics/tc409 https://www.irs.gov/taxtopics/tc409
- refurb 4y ago
  Absolutely the masses can use it. Last year was a great time to do it. SP500 was down, but many tech stocks weren't (yet). Sell your Vanguard ETF, use the loss to offset the tech stock you sold with huge gains. Buy back another ETF that is highly correlated with the SP500. Net capital gains = $0 and you still hold the same SP500 position as before.
  - anonymouskimmer 4y ago
    > "Absolutely the masses can use it." It looks like the majority of people who own stock own it in things like retirement accounts[1, Table 3.]. Tax-deferred retirement accounts apparently can't use this trick[2]. 1 - https://wallethacks.com/stock-ownership-in-america/ https://wallethacks.com/stock-ownership-in-america/ 2 - https://www.irs.gov/newsroom/what-if-my-401k-drops-in-value https://www.irs.gov/newsroom/what-if-my-401k-drops-in-value
- foxyv 4y ago
  Betterment lets you do it through their pseudo index fund.
mathgladiator 4y ago
You don't buy back the same stocks, you buy back similar stocks or ETFs.
- jjtheblunt 4y ago
  you might buy back the same stocks, to game the longterm vs shortterm capital gains rules, no?

chii 4y ago

In some jurisdictions (such as Australia), this is called a wash sale, and is illegal.

ojbyrne 4y ago
The entire article is about wash sales, basically describing ways to circumvent the rules.
merek 4y ago
The IRS will also reject the reported loss if it qualifies as a wash sale. > You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities. https://www.irs.gov/pub/irs-pdf/p550.pdf https://www.irs.gov/pub/irs-pdf/p550.pdf

klyrs 4y ago

> Although this is also available to masses . Not in any meaningful sense. Only the ultra-wealthy can wipe out the lion's share of their tax bill through this loophole. From the article: > Someone like Ballmer can easily deploy $100 million in losses to cancel out a $100 million gain from selling some of his vast Microsoft holdings. It’s a very different story when it comes to wages and other forms of income, of which only $3,000 can be offset. On average, only the top 0.001% of taxpayers made a majority of their income through investment gains in 2018, according to public IRS data.

missedthecue 4y ago
If he's eating $100 million in losses in one investment and gaining $100 million in another, he's not any richer at the end of the year. I'm not sure what the outrage is. But like you say you can only deduct $3000 of capital losses per year. Completely and entirely immaterial to a billionaire like Ballmer, but very valuable to someone in the middle class or lower.
- dataflow 4y ago
  > you can only deduct $3000 of capital losses per year Edit: I thought that limit is just for your ordinary income but there seems to be disagreement on this?
  - deleted 4y ago
    [deleted]
  - ctchocula 4y ago
    You are correct and missedthecue is incorrect. IRS laws say you can deduct $3000 ordinary income (i.e. income earned by working, so doesn't include capital gains) per year and deduct without limit against capital gains. Should your capital losses exceed your capital gains that year, you can carryforward the rest of the capital losses without limit onto the next year 2023, 2024, etc. The whole point of the article is that "tax loss harvesting" beneficial to Steve Ballmer and the other billionaires mentioned in the article, because they have $Bs in capital gains to begin with (Steve Ballmer had highly appreciated MSFT stock as mentioned in the article). An average Joe like you and me even if we have that much capital losses would find it difficult to find the capital gains to deduct against, so we're typically limited to only $3000 per year deducting against ordinary income (compare against no limit for capital gains), which is much less useful tax shield compared to someone like Steve Ballmer who gets most of his income from capital gains, and who therefore can use his massive cap losses to shield against taxation much more effectively. This is the part that makes "Although this is also available to masses" somewhat moot. Even though it's "technically" possible, the masses don't have the massive capital gains to actually deduct against, so they don't benefit from this to nearly the same magnitude as someone who draws most of their income from capital appreciation. Therefore, one could argue that this section of the tax code is "unfair" in year 2023. The article makes the case that wash sale rule was effective in the 1920s, but that in the 100 years that have passed, technology has made evading the wash sale rule trivial (especially for billionaires), so the rule as drafted in the 1900s is no longer effective at preventing what it intended. Source: https://www.irs.gov/taxtopics/tc409 https://www.irs.gov/taxtopics/tc409
refurb 4y ago
Absolutely the masses can use it. Last year was a great time to do it. SP500 was down, but many tech stocks weren't (yet). Sell your Vanguard ETF, use the loss to offset the tech stock you sold with huge gains. Buy back another ETF that is highly correlated with the SP500. Net capital gains = $0 and you still hold the same SP500 position as before.
- anonymouskimmer 4y ago
  > "Absolutely the masses can use it." It looks like the majority of people who own stock own it in things like retirement accounts[1, Table 3.]. Tax-deferred retirement accounts apparently can't use this trick[2]. 1 - https://wallethacks.com/stock-ownership-in-america/ https://wallethacks.com/stock-ownership-in-america/ 2 - https://www.irs.gov/newsroom/what-if-my-401k-drops-in-value https://www.irs.gov/newsroom/what-if-my-401k-drops-in-value
foxyv 4y ago
Betterment lets you do it through their pseudo index fund.

mathgladiator 4y ago

You don't buy back the same stocks, you buy back similar stocks or ETFs.

jjtheblunt 4y ago
you might buy back the same stocks, to game the longterm vs shortterm capital gains rules, no?