Wednesday, December 30, 2020

2020 Tax-Loss Harvesting (Part 1)

In previous years, I've sold stocks in late November and December to offset capital gains and to limit my tax liability. Given the stock market crash in late February and early March, it is remarkable that I'm facing a similar challenge in 2020. 

So far in 2020, I've recorded capital gains of about $14,383, and another $14,494 from options income. Additionally, I'm expecting to have dividend income totaling about $30,000 in 2020. 

To lighten my 2020 tax burden as much as possible, I decided to realize some offsetting losses by trimming and even closing several losing positions. This strategy of tax-loss harvesting is not without problems, but I like having an excuse to clean house.

Part 1 of this article explains the ins-and-outs of tax-loss harvesting and reports a recent sell I made to offset 2020 capital gains. Part 2 and Part 3 will cover additional sells. In all, I closed seven positions to harvest tax losses.

Tax-Loss Harvesting


Tax-loss harvesting is a strategy of selling losing stock positions to offset capital gains taxes. The IRS discourages tax-loss harvesting by requiring that investors wait 31 days before repurchasing a stock sold at a loss. You also don't qualify for a capital loss if you sell a stock at a loss within 30 days of buying it. This is called the wash-sale rule

One problem with selling dividend-paying stocks with the hope of buying them back after 31 days, is that you may end up paying more for the shares than you sold them for. Or, as happened with me in 2017 when I closed my TGT position, the stock surged higher so fast that I could not get back in at a reasonable valuation when I wanted to.

When selling dividend-paying stocks to harvest tax losses, you need to consider the ex-dividend dates of those stocks. Giving up a dividend payment may not be worth the potential tax benefit.

I'm hoping to reopen some of the positions I'm closing now, but not necessarily all of them. To abide by the IRS wash-sale rule, I'll have to wait until 31 January 2021 before doing so. 

Gilead Sciences, Inc (GILD)


In December 2018, I executed a similar tax-loss harvesting trade on GILD, selling 200 of 300 shares for $65.74 per share. In the process, I booked a capital loss of $2,897. 

In February 2019, I bought 100 shares at a higher price of $67.01 per share, resulting in an overall reduction of my average cost basis to $70.64 per share. 

Unfortunately, GILD has continued to perform poorly. After several acquisitions, the company has repositioned itself to generate double-digit shareholder returns in 2021. 

I'm hoping to reinvest in GILD in February 2021, hopefully well below my previous cost basis of $70.64 per share. We'll see how it goes!

GILD Trade Summary

2018-09-05Bought 100 shares of GILD at $74.28 per share:$7,428.00
2018-09-27 Dividend on 100 shares at 57¢ per share: $57.00
2018-12-28 Dividend on 100 shares at 57¢ per share: $57.00
2019-02-20Bought 100 shares of GILD at $67.01 per share:$6700.69
2019-03-28 Dividend on 200 shares at 63¢ per share: $126.00
2019-06-27 Dividend on 200 shares at 63¢ per share: $126.00
2019-09-27 Dividend on 200 shares at 63¢ per share: $126.00
 2019-12-30 Dividend on 200 shares at 63¢ per share: $126.00
2020-03-30 Dividend on 200 shares at 68¢ per share: $136.00
2020-06-26 Dividend on 200 shares at 68¢ per share: $136.00
2020-09-29 Dividend on 200 shares at 68¢ per share: $136.00
2020-12-30Dividend on 200 shares at 68¢ per share:$136.00
2020-12-30Sold 200 shares of GILD at $57.02 per share:$11,404.00

                                                 
              

Capital Loss: $2,724.69

Dividends Received:$1,162.00

Commissions/Fees/Taxes:
$
-3.00

Net Loss:
$
1,565.69

I made a net loss of 12.0% on the original amount invested, which is a loss of 5.7% annualized.

Selling 200 shares reduced DivGro's projected annual dividend income (PADI) by $544. 

Conclusion


I'm harvesting tax losses to reduce my tax liability for 2020.

With almost $29,000 in capital gains in 2020, I'm taking some large losses by trimming or closing losing positions. Doing so is unpleasant, but I'll be saving some money at tax time and it cleans house, so to speak. 

GILD is a high-quality stock with good prospects, especially after having repositioned itself through several acquisitions. I'm planning to reinvest in GILD before it goes ex-dividend again. 

In Part 2 and Part 3, I'll cover several additional sells I executed for tax-loss harvesting purposes.

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2 comments :

  1. I am looking at GILD,my average is 67 ,i am thinking of rounding it to 100 stocks and write covered calls

    ReplyDelete
    Replies
    1. That's a good strategy, in my view. Make sure you set the strike price at a level you won't mind selling the shares.

      Delete

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