Sunday, December 3, 2017

Recent Sells To Harvest Tax Losses

Tax-loss harvesting is a strategy to offset capital gains and so limit your tax liability. Usually, it is done by intentionally selling a losing position to offset capital gains.

So far in 2017, I've earned about $8,600 in capital gains from stocks sold and an additional $8,400 in options income. More than half of these gains are short-term gains.

Having achieved my dividend income goals for 2017, I think it is wise to take some action and limit my tax liability. This article reports on two recent sells executed with tax-loss harvesting in mind.

The Basics of Tax-Loss Harvesting


Tax-loss harvesting is a strategy of selling losing stock positions to offset capital gains taxes. It is normally executed to offset short-term capital gains, which are taxed at higher federal income tax rates than long-term capital gains. However, you can also offset long-term capital gains in this way.

Tax-loss harvesting can be beneficial even if you do not have capital gains to offset. Up to $3,000 of realized losses can be used to offset your income in a tax year. Additional capital losses can be carried over and applied in subsequent tax years.

Although tax-loss harvesting can potentially reduce your tax bill, there are certain risks to consider.

To discourage tax-loss harvesting, the IRS (Internal Revenue Service) disallows taxpayers from claiming losses on so-called wash sales. Investors have to wait 31 days before repurchasing an investment sold at a loss. The wash rule also prohibits buying anything substantially similar, including options to buy the stock.

If you sell a losing position and wait 31 days to buy it back, you could end up paying more for the stock than you sold it for.

If you sell dividend-paying stocks to harvest tax losses, you'd want to consider the ex-dividend dates of those stocks. Giving up a dividend payment may not be worth the potential tax benefit.

Three Candidates


Earlier this week I looked at my portfolio and identified three candidates for tax-loss harvesting.

The first is General Electric (GE), which I identified in November's pulse article as DivGro's worst-performing stock. GE announced a 50% dividend cut on 13 November and the stock price plunged 8%, intensifying the losses suffered in 2017. Year-to-date, GE is down more than 43%!

While I thought about waiting to see if GE's stock price would consolidate a bit, I changed my mind when I looked at my tax-loss harvesting opportunities. With only three candidates (including GE) that qualify for tax-loss harvesting, I don't think I have the luxury of waiting!

To be clear, I have no intention of buying back my GE position in 31 days.

The second candidate is Target (TGT) with a loss of about 17%. It looks like TGT is slowly recovering, but it will be a while before my position moves back to my cost basis of $71.31 per share:
So it will be welcome to reset my cost basis to about $60 per share.

TGT's traded ex-dividend on 14 November, so by selling my shares now, I'll still receive TGT's generous dividend in December. Furthermore, as long as I restore my position sometime in January or early February, I won't miss out on any dividend payments.
The third candidate for tax-loss harvesting is Gilead Sciences (GILD), which is down about $5 per share from my cost basis of $80.23. The loss is rather small, so perhaps executing the trade is not worth the risk of having to buy GILD back at a higher price later. Consider the following 5-year chart, courtesy of Google Finance:
While not firmly established, it looks like GILD is transitioning to an upward trend (despite the recent drop from the 52-week high of $86.27 per share). It is likely that GILD would be trading higher in the new year.

GILD will not be trading ex-dividend until 14 December, so I'll reconsider the situation at that time. However, unless GILD drops significantly, I probably won't sell my GILD shares to harvest tax losses.

GE Trade Summary 


2017-03-01Bought: 300 shares of GE at $31.00 per share:$9,300.00
2017-07-25 Dividend on 300 shares at 24¢ per share: $72.00
2017-10-25 Dividend on 300 shares at 24¢ per share: $72.00
2017-11-30Sold 300 shares of GE at $18.39 per share:$5,517.30
                                                               
Capital Loss: $3,782.70

Dividends Received:$144.00

Commissions/Fees/tTaxes:
$
4.77

Net Loss:
$
3,643.47

I made a net loss of 39% on the original amount invested, which is a loss of 52.2% annualized.

Closing my GE position reduces DivGro's PADI by $144.

I should also report my GE-related options trades. The following table presents these trades in order of execution:

IDDATE:NO×TICKER OPTION INCOME ( EXPENSES ) ROLLED  SECURED TOTAL
#0482017-01-17:  3×GE 03 Mar 2017 $31.00 P $    180.00 ( $        -1.48 )$ 178.52  $ 178.52 
#0912017-07-01:  3×GE 15 Sep 2017 $33.00 C $      98.50 ( $        -4.97 )→ #099$   93.53  $ 272.05 
#0992017-07-18:  3×GE 18 Jun 2018 $30.00 C $    153.00 ( $      -12.21 )$ 140.79   $ 412.84 

 key:  expired  •  closed  •  rolled  •  assigned  •  open 

So I netted $412.84 from my options trades.

Overall, I lost $3,230.63 on my GE trades, which equates to 34.7% of my original investment.

TGT Trade Summary


2016-12-27Bought: 100 shares of TGT at $73.86 per share:$7,386.00
2017-03-10 Dividend on 100 shares at 60¢ per share: $60.00
2017-05-15Bought: 200 shares of TGT at $70.00 per share:$14,000.00
2017-06-12 Dividend on 100 shares at 60¢ per share: $60.00
2017-09-10 Dividend on 300 shares at 62¢ per share: $186.00
2017-11-30Sold 300 shares of TGT at $60.88 per share:$18,264.42
                                                               
Capital Loss: $3,121.58

Dividends Received:$306.00

Commissions/Fees/tTaxes:
$
8.76

Net Loss:
$
2,824.34

I made a net loss of 13% on the original amount invested, which is a loss of 13.5% annualized.

Again, let's look at my options trades related to TGT:

IDDATE:NO×TICKER OPTIONINCOME( EXPENSES ) ROLLED SECUREDTOTAL
#0022016-06-16:  1×TGT 20 Jan 2017 $65.00 P $    370.00 ( $      -12.04 )$     357.96  $    357.96 
#0432016-12-23:  2×TGT 20 Jan 2017 $72.50 P $    246.00 ( $ -1,560.96 )→ #050$ -1,314.96  $   -957.00 
#0442016-12-27:  1×TGT 21 Apr 2017 $77.50 C $    200.00 ( $      -20.28 )→ #061$     179.82  $   -777.18 
#0502017-01-20:  2×TGT 21 Jul 2017 $70.00 P $ 1,540.00 ( $        -2.60 )$  1,537.40  $    760.22 
#0612017-02-24:  1×TGT 20 Oct 2017 $75.00 C $    157.00 ( $        -5.68 )→ #064$     151.32  $    911.54 
#0642017-03-17:  1×TGT 19 Jan 2018 $65.00 C $      93.00 ( $    -117.89 )$      -24.89  $    886.65 
#0842017-06-16:  2×TGT 20 Oct 2017 $45.00 P $    248.00 ( $      -22.58 )→ #108$     225.42  $ 1,112.07 
#0902017-06-21:  2×TGT 19 Jan 2018 $65.00 C $      76.00 ( $    -352.34 )$    -276.34  $    835.73 

key:  expired  •  closed  •  rolled  •  assigned  •  open 

So I netted $835.73 from my options trades.

Overall, I lost $1,988.61 on my TGT trades, which equates to 9.3% of my original investment.

Conclusion


With these trades, I'm harvesting tax losses to reduce my tax liability for 2017. Taking large losses for the sake of tax-loss harvesting is not a pleasant affair, but, at least, I'll be saving some money at tax time.

I'll probably reinstate my position in TGT in January, as the stock seems to be consolidating and TGT is one of the higher yielding dividend growth stocks available, yielding 4.17% at $59.51 per share.

I won't reinvest in GE for a long time, if at all. The company will need to work hard at reestablishing the trust of dividend growth investors, which will take a long time.

Are you executing any tax-loss harvesting trades this year? Do you think it is worth the effort? Please comment below and thanks for reading!

4 comments :

  1. Among the three I'd choose TGT though I suspect most would probably vote to shuttle GE. No shortage of negative sentiment there. I'm in the red with GE too but plan to hold on and maybe even buy a bit more in December. Look forward to seeing your direction.

    ReplyDelete
    Replies
    1. You're right about the negative sentiment on GE. Initially, I thought to hold on but being able to reduce my tax liability seemed more important. As for TGT, I hope the share price gives me a chance to get back in at about the same price as my sold shares. But that's the risk of this strategy. At least I won't miss dividends.

      Delete
  2. Hi FerdiS, I like what you've done. GE would be my first candidate to sell, especially considering you won't reinvest any time soon. As for TGT, you can consider that sale a success if you get to reset your cost basis around the $60 mark. There's always a risk that it runs up, but that comes with the territory. As always, thanks for sharing the details. No tax loss harvesting on the horizon, but we've got a few weeks to go.

    ReplyDelete
    Replies
    1. Thanks for commenting, Engineering Dividends!

      Yes, hopefully TGT will stay around $60. That way, I'll have a lower cost basis and still earn a yield of over 4%.

      A run up in the stock price is a problem, but there's a way to counteract that if that's what you anticipate would happen.

      The other way to do tax-loss harvesting is to double-up on a losing position, provided you have cash and do it at least 31 days before the last trading day in the year. Then you sell the original lot (or lots) just before year's end and keep the new lot. I missed that opportunity this year because I waited to long to consider potential tax-harvesting trades.

      Delete

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