What You Need to Know
- Advisors should take advantage of stock dips throughout the year.
- They need to be aware of the 30-day wash sale timeline.
- A key goal is to book the greatest number of tax losses possible.
Wall Street phenom and Ark Investment Management founder Cathie Wood recently said in a monthly conference call that during market drops, she will buy up her favorite stocks — Tesla, for example. However, Ark also sells other stocks to “tax-loss harvest” during that time.
Wood is a smart trader, but she’s also a smart tactician when taking advantage of market losses. She’s a perennial tax-loss harvester — unlike most advisors, who may wait until the fourth quarter to harvest client portfolio losses for tax reasons.
Advisors really should be “tax-smart” and harvest losses throughout the year, as opposed to doing it seasonally, said Rob Klapprodt, co-founder and corporate strategy officer, for Vestmark, a financial software platform. The reason: They would book more losses.
“We typically see a spike in tax-loss harvesting activities in Q4,” Klapprodt told ThinkAdvisor. “[This] makes sense as [they’re] starting to think about the year that just transpired and how to minimize the tax bill that may be coming up.”
The problem is, security prices fluctuate throughout the year. Think Tesla: It fell 21% from March 1 to March 8, but may end the year with a gain. That won’t help a client’s year-end tax bill, but when Tesla was down, it was a good time to sell and book those losses, he said.
Advisors are “able to exploit or get some benefit throughout the year of dips in security prices,” versus waiting to the end of the year, when prices may have rebounded, Klapprodt explained. That said, there are a couple of factors to keep in mind:
Minimum Trade Size
Klapprodt says that instead of making hundreds of little trades that create record-keeping headaches and increase overhead, Vestmark encourages advisors to set a minimum trade size.
Wash Sale Management
A wash sale is selling to generate a loss and buying it back within a 30-day period. The Internal Revenue Service doesn’t “deem a sale that generates a loss as being a true sale if you turn around and buy it back inside of 30 days,” Klapprodt said. “Advisors have to be mindful of that,” since they can’t harvest that loss.
To wait out the 30 days, they can “park” the amount generated from the sale into cash or buy a different stock or even an index fund within that period of time without being dinged by the IRS.