Tax-loss selling involves selling a stock that has lost value in order to realize a taxable loss. The loss can be used to eliminate other long-term or short-term taxable gains.
Here is an example of the benefits of tax-loss selling:
Stock A is purchased at $100. It is sold six months later for $40 at a $60 loss. Assuming 40% combined state and federal tax rate, this loss leads to a tax savings of $24. After 31 days, the $40 proceeds from the sale and the $24 tax savings are reinvested in the stock. If the stock is still priced at $40, this buys 1.6 shares. See below:
Buy stock: $100
Sell stock: $40
Taxable loss: ($60)
Tax savings: $24
Reinvest proceeds: $64 ($40 sale proceeds + $24 tax savings)
$64 purchases 1.6 shares at $40 per share
If stock A’s price goes back to $100, the 1.6 shares rise in value to $160. If the 1.6 shares of stock A are sold again in six months at $100 per share, the investor clears $111.60 even after taxes assuming a 40% combined state and federal tax rate. See below:
1.6 shares sold at $100: $160.00 proceeds
Cost basis of 1.6 shares: $64.00
Taxable gain of: $96.00
After-tax net gain of: $57.60 ($96 less 40% taxes)
Plus basis: $64.00
Total after-tax proceeds: $111.60
If the 1.6 shares are instead held for one year then sold at $100 per share, the investor clears $139.84 after taxes assuming a 21% combined state and federal tax rate for long-term gains. See below:
1.6 shares sold at $100: $160.00 Proceeds
Cost basis of 1.6 shares: $64.00
Taxable gain of: $96.00
After-tax net gain of: $75.84 ($96 less 21% taxes)
Plus basis: $64.00
Total after-tax proceeds: $139.84
In either case, the initial investment of $100 has increased in value after-tax, to either $111.60 or $139.84, even though the stock ends at the same price it began. If you would like any further information regarding this issue as well as any other tax related issue, please contact Henssler Financial’s Tax Experts at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
