Tax Loss Harvesting

[spartansaver]

It's always nice to know why something is falling. Do any of you have a good framework for knowing when tax loss harvesting is driving down a share price (other than its near year end and the stock is down on the year)?

[Sweet]

18 minutes ago, spartansaver said:

It's always nice to know why something is falling. Do any of you have a good framework for knowing when tax loss harvesting is driving down a share price (other than its near year end and the stock is down on the year)?

I have a rule.  

Probability of it being tax loss harvesting = <1%.

 

Probability of bag holders blaming tax loss harvesting (cope) = >100%
 

In all seriousness, nobody can possibly know, but I find it is the usual types that blame it on tax loss harvesting (die hard bulls).

 

 

Edited December 8, 2023 by Sweet

[SharperDingaan]

Just use the calendar; for most folks, a December sale that hasn't taken place by the 24th, probably isn't going to - BTC being the exception. Most folks sold by mid-November, so that the 31 day period was over by mid-December. They are the ones buying today, when everyone else is selling .

 

Despised by the many (who didn't think), for most - tax loss selling is actually a smart thing to do. The longer term (mid November), vs short-term (mid December) orientation often realising a 5%+ cash return on the swing trade; that both lowers your cost base, and pays for Christmas. 

 

SD

 

 

 

 

[ValueArb]

The only time I was able to take advantage of tax loss harvesting was the year the internet bubble burst. I still had a hundred thousand shares or so in an internet company that had bought a startup I worked at. I knew a fellow entrepreneur who also sold his company to same internet company and he had told me he had exercised options for millions of shares that spring after his company sold in order to hold them for long term capital gains. My lockup agreement expired in mid December but the company's stock price had fallen from $26 all the way to near $1. I had no faith in the Internet company's future so I immediately start to sell but the price kept declining on me, and after a few days it had dropped below 90 cents.

 

Thats when I realized what was happening. My acquaintance was going to owe income tax on the $26 stock price that existed when he sold his business, because of the AMT calculation, so he likely owed over $5M in taxes. The only way to eliminate that tax obligation was to sell all those shares before the end of the year so he was taxed on the sale, not exercise, price. So despite my terror at holding on to this POS, I stopped selling and waited for January. The stock price got down to the 70 cent range IIRC on the last day of the year, then after a week or so in January was trading at $1.30 where I got out.

 

Its almost never that you can have specific enough information on large enough holders to predict price action, this was my one time.

[SharperDingaan]

A lot of the 'tax loss selling' is the inexperienced, and the day traders, who need to blame anything else but themselves. Human nature.

It is also relatively predictable; look at the junior's who did multiple acquisitions over the last 2 years, and which have had expiring lockups throughout the current year. Lot of sellers aren't investment people, don't talk to their advisers until too late, and acquisition/lock-up information is not hard to find; most every deal has a press release disclosure    

 

SD 

[sleepydragon]

59 minutes ago, ValueArb said:

The only time I was able to take advantage of tax loss harvesting was the year the internet bubble burst. I still had a hundred thousand shares or so in an internet company that had bought a startup I worked at. I knew a fellow entrepreneur who also sold his company to same internet company and he had told me he had exercised options for millions of shares that spring after his company sold in order to hold them for long term capital gains. My lockup agreement expired in mid December but the company's stock price had fallen from $26 all the way to near $1. I had no faith in the Internet company's future so I immediately start to sell but the price kept declining on me, and after a few days it had dropped below 90 cents.

 

Thats when I realized what was happening. My acquaintance was going to owe income tax on the $26 stock price that existed when he sold his business, because of the AMT calculation, so he likely owed over $5M in taxes. The only way to eliminate that tax obligation was to sell all those shares before the end of the year so he was taxed on the sale, not exercise, price. So despite my terror at holding on to this POS, I stopped selling and waited for January. The stock price got down to the 70 cent range IIRC on the last day of the year, then after a week or so in January was trading at $1.30 where I got out.

 

Its almost never that you can have specific enough information on large enough holders to predict price action, this was my one time.

 

gosh you are old

Btw, I also know people during the Dotcom. Some colleagues Borrowed millions from my ex-company and exercised their options, waiting to sell later for long term capital gains. Then stock tanked like 90% from Nov to Jan 2000. They owes millions of loans from the company and they are left with millions of capital loss.   I don't know what happened to them. Some said the loan were forgiven by the company later.

 

 

[Spekulatius]

if a stock drops a lot, the tax loss can be worth more than the shares you hold. Example - assumed 30% tax rate. Stock drops from $5 to $1, so that's a $4 drop x 0.3=$1.2 worth of tax writeoff.

 

One of the issues with the US tax code is that you can only write off tax losses against gains in the same year or use them against future gains. It's set up asymmetrical that way.

In the tax bubble I have seen folks using their house because they were taxed on gains (from equity grants) that they failed to realize to save taxes. After their stock plummeted in 2020, the unrealized gains vaporized but they were still on the hook for the taxes from unrealized gains.

Edited December 12, 2023 by Spekulatius

[ValueArb]

5 hours ago, sleepydragon said:

 

gosh you are old

Btw, I also know people during the Dotcom. Some colleagues Borrowed millions from my ex-company and exercised their options, waiting to sell later for long term capital gains. Then stock tanked like 90% from Nov to Jan 2000. They owes millions of loans from the company and they are left with millions of capital loss.   I don't know what happened to them. Some said the loan were forgiven by the company later.

 

 

 

You can't imagine how old.

 

I had a friend who was an early important employee for one of the early browser developers. When they went public his options were worth over $20M, so he bought them. The next year they were worth $4M while his AMT tax obligations had to be closer to $6M so I asked him how he dealt with the tax issue. He said he ignored it, that he always intended to hold the shares for a very long time and just put them away and wasn't going to worry about it. I think it turned out fine for him, that year the IRS just turned a blind eye to AMT obligations for employee stock options to avoid a PR nightmare. 

[ValueArb]

5 hours ago, Spekulatius said:

if a stock drops a lot, the tax loss can be worth more than the shares you hold. Example - assumed 30% tax rate. Stock drops from $5 to $1, so that's a $4 drop x 0.3=$1.2 worth of tax writeoff.

 

One of the issues with the US tax code is that you can only write off tax losses against gains in the same year or use them against future gains. It's set up asymmetrical that way.

In the tax bubble I have seen folks using their house because they were taxed on gains (from equity grants) that they failed to realize to save taxes. After their stock plummeted in 2020, the unrealized gains vaporized but they were still on the hook for the taxes from unrealized gains.

 

Since almost all of my investments are in IRAs now I think I still have capital losses from the GFC that I haven't been able to use yet. 

[sleepydragon]

27 minutes ago, ValueArb said:

 

Since almost all of my investments are in IRAs now I think I still have capital losses from the GFC that I haven't been able to use yet. 

You can buy arb deals. Most of them are short term capital gains. Can even leverage up with options