Even in an outstanding year for stocks, there are still losers. Precious metals stocks and funds, for example. Others include some individual stocks, commodities, some emerging markets, and many types of bonds.
Harvesting capital losses at year-end can be a valuable tactic, especially for high-income clients. Such clients may owe tax on capital gains at high effective rates going forward, and they can offset those highly-taxed gains with a “bank” of realized capital losses.
However, capital losses won’t count immediately if clients execute a wash sale, so they shouldn’t buy back the relinquished security right away. “There are several ways to avoid a wash sale, but for one of them—doubling up—you must start by the end of November,” says Roger Lusby, III, managing partner in the Alpharetta, Ga., office of the accounting firm Frazier & Deeter.
After selling a security at a loss, investors can immediately buy back something that’s not identical, but that won’t help if they want to hold a specific asset. Alternatively, they can wait for more than 30 days and then execute a repurchase, but that means possibly missing a sharp upward move in these volatile times.
As an alternative, clients can double up on the loss position destined for a sale. As an example, suppose Kim King holds $20,000 of a gold mining stock, which she bought for $30,000. Kim can buy another $20,000 of that stock in November, doubling the number of shares she owns. After waiting more than 30 days, in late December she can sell her original shares, taking her capital loss while avoiding a wash sale. Kim will wind up with the same number of shares she had originally, and she won’t be out of the market, in case the stock moves up in December.
“By doubling up, investors can reduce their average cost per share,” says Lusby, who also serves on the advisory board of FD Capital Advisors, the corporate finance and investment banking affiliate of Frazier & Deeter. “Of course, the real question is whether the security you’re buying back will turn out to be a good investment.” If so, investors who double up will be in a position to post better investment results, and they’ll also have a tax-saving capital loss.
Considering the higher tax rates on gains, the 3.8% Medicare surtax on net investment income, and the devaluation of itemized deductions, top-bracket investors may gain with an astute method of taking losses.