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Financial Planning > Tax Planning > Tax Loss Harvesting

Why Ark's Cathie Wood Harvests Tax Losses Year Round, and You Should, Too

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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.

For example, if they sell Tesla during a dip, they can move those proceeds into the Nasdaq index or an ETF that might be tech-related (it may have a small amount of Tesla). On day 31, they can move it back into Tesla if desired.

Although Vestmark software will send alerts to mark the end of the wash sale period, “we don’t impose any investment decisions or [say] what users should or shouldn’t be doing,” he said. “[Yet] we tend to see people parking [proceeds] into some sort of ETF during the wash sale period.”

The Goal

Klapprodt says the goal of tax-loss harvesting is to “generate the desired amount of losses in the client portfolio and just try to improve the client’s after-tax alpha.”

By harvesting throughout the year, advisors can generate more losses than they would by waiting until Q4, Klapprodt says.

He also understands that selling at a loss is counterintuitive, but adds that advisors need to be savvy when it comes to tax issues.

For example, he cites GameStop, which ran up in January (to $347.51 on Jan. 27)  and then fell to $53.50 on Feb. 4. Had the advisor sold then with the loss and parked the money for 30 days in another stock, ETF or cash, they could have reinvested in GameStop if interested 31 days later — around March 8, when it was at $246.90.

The advisor generates the losses now because they don’t know where GameStop is going to be in November or December, he says. “So there is an opportunity, a window to harvest those losses.”

Advisors need to be “tax-smart in everything [they] are doing,” Klapprodt said. Therefore, when buying and selling stocks, “do it with a notion of tax-loss harvesting. We encourage advisors to think about the client tax bill and what they can do to minimize it.”