Tax Loss Harvesting
Could "tax loss harvesting" ever improve after-tax returns? Brokerages pitch it all the time, but it sounds like all you ever do is defer the same amount of taxes into the future. I guess this could be +npv given time value of money.
For a short answer, I definitely think that finding a company to invest in which has just created a significant net operating loss (nol) tax asset could be profitable. But only if this was created by a "fluke" bad year. In any case, it is not a guaranteed "win" from an investors view. I would have several fears...
1) You can only deduct your current losses from future profits if you actually have future profits. Otherwise, you will never get a tax benefit.
2) The creation of a nol tax asset also tells you that the company has now had at least 3 years of cumulative losses. This is because companies would have first taken their losses and carried them back two years if they have enough income to justify it. With not enough profits in the past years to create deductions, you can't carry losses backwards, so you must create a nol asset to have any hope of "recapturing" your losses.
So in sum, creating a nol asset means that the company is on a 3+ year losing streak.
3) If tax rates change (specifically, go down), NOL assets could lose a majority of their value.
4) A NOL is certainly good thing, it cuts taxes, but it is also just one type of tax asset/liability. A broker could tell you "oh they have a $100 million tax asset - so it will lower XYZ company's taxes by $100 million," but not mention to you that the company has also accelerated their tax depreciation, so they will have millions of dollars to pay in additional taxes for those.
Its like saying "look at these tax deduction opportunities" without saying "look at these former deferred taxes coming to term now, which will offset the benefits of any of these deductions"
Hope this helps,
-future CPA and incoming PwC audit intern.
Closing out losses for tax benefits (Originally Posted: 12/31/2009)
So because today is the last day of the year, if I close out losing positions and re-open them tomorrow, will I be able to take that loss off on my taxes? It seems like you should be able to, but I just wanted to make sure...
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"I just want to be a monkey of average intelligence who wears a suit. I know, I'll go to business school!"
Nope
http://en.wikipedia.org/wiki/Wash_sale
But if I bought it in, say, February, it would be allowed?
No, You cant make a sales transaction for tax purposes and then repurchase in under 31 days. If you do, you will not be able to use the tax benefit.
It may not be so much of a benefit if you have more than net 3k in losses since as an individual filer you can only realize up to 3k in losses each year. The rest is carried forward to next year.
Can someone check me on this, just in case.
It's called a wash sale and no, it doesn't work.
In response to the above poster, an individual is only allowed to write off a net loss of $3,000 per year, but that is after offsetting ALL gains for the year with any losses. In other words, if you have $50,000 in capital gains, you can actually write off $53,000 in losses (zero out the gains + $3,000 in losses).
Yarm, do you really think they would make it that easy? Google wash sale rules. Make sure that you are aware that it is 30 days before and 30 days after the sale date.
3K is the max for individual filers and losses carry forward to offset future gains
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