Alexander Green is an analyst, author and speaker whose primary mission is to show investors how to achieve and maintain financial independence. For 16 years, he worked as an investment advisor, research analyst and portfolio manager on Wall Street. He has been the Chief Investment Strategist of The Oxford Club since 2001. He has written several New York Times bestsellers, including The Gone Fishin’ Portfolio, Beyond Wealth, The Secret of Shelter Island and An Embarrassment of Riches.
In addition to directing The Oxford Communiqué (as well as The Oxford Communiqué Pro), he oversees three fast-paced VIP Trading Research Services: Oxford Microcap Trader, The Momentum Alert and The Insider Alert. He also writes for Liberty Through Wealth, a free e-letter focused on financial freedom that has more than 100,000 subscribers.
Each year, you have an opportunity to save thousands of dollars in taxes.
One of the worst investment mistakes I ever made will illustrate how and why…
In December 1996, I sold my shares of Best Buy (NYSE: BBY). The stock wasn’t down much and I still liked the company’s prospects. I sold it only to offset realized gains elsewhere in my portfolio.
It turned out to be one of the most boneheaded investment moves I ever made.
A year later the stock was up more than five-fold. A few years after that, it was up more than thirty-fold.
In order to sell a stock for a tax loss, you must not have bought any shares for at least 30 days before the sale – and you cannot buy any more shares for at least 30 days after the sale. (Otherwise, you run afoul of the wash-sale rule.)
I could have bought Best Buy back a month later, of course. But I didn’t because it was trading substantially higher than where I sold it. So I decided to wait for it to come back down.
The problem was… it didn’t.
That was a valuable lesson. I never sell an investment for tax reasons alone anymore. I don’t need to.
And neither do you.
Here’s why…
The IRS allows you to offset all your realized gains – and up to $3,000 in earned income – each year with realized losses. (Any losses you don’t use can be carried forward and used in future years. But if you do use a loss on a particular stock, you must wait at least 30 days before buying the same stock back.)
There is a risk in taking tax losses in December, however. It’s called the January effect.
The first month of the year is traditionally a strong one for the market. A lot of pension and IRA money gets invested in January. Plus, there is often a rebound from the tax-loss selling that takes place in December.
Who wants to pay more for a stock they sold only a few weeks earlier?
There is a way around this problem, however. And you can take advantage of it – but only if you’re willing to make the right move at the right time.
In November each year, I look at my entire portfolio for companies that are trading below my entry price. If I see a stock that is down – but remains fundamentally attractive – I sometimes make the decision to double down on it for 30 days.
Why? Because I can sell my original shares at the end of December for a tax loss. That way it’s not a problem if the stock rallies in January. After all, thanks to my November purchase, I still own the same number of shares I bought originally. I just don’t own the original shares since I sold those for a tax loss.
Let me run through an example to make sure you understand the specifics… because the tax savings are substantial.
You have an opportunity to realize a loss in your 1,000 shares of XYZ Corp. But instead, you double down on the stock for a month by buying another 1,000 shares. After 30 days, you sell the original shares at a loss, creating thousands of dollars in tax savings. But you keep the second 1,000 shares you bought in November. Now, even if the stock takes off in late December or January, you don’t have to buy it back at a higher price.
What if you don’t have the cash to double down on your position? Then use margin.
Again, I’m recommending this only for a 30-day period. So your margin interest charge will be minimal.
The risk, of course, is that the stock continues to decline and you have a paper loss on the second purchase.
However, just the opposite may happen – and often does.
Remember, the January effect is often preceded by the Santa Claus rally – the tendency of the stock market to do well in the last three weeks of December. As a result, you could end up with a smaller loss in your original shares and a paper gain on your second purchase.
(The Santa Claus rally is never certain, of course, which is another reason you should add only to those companies whose near-term prospects remain exceptional.)
Again, when selling for tax purposes, the IRS prohibits you from buying more shares of the stock for at least 30 days before and after you sell your original shares. So to use this strategy for 2024, you must act – i.e. double down on a stock in which you have a loss – in November.
If we have the traditional mid-December to early February rally, you’ll thank me.
And then you’ll thank me again on April 15.
Good investing,
Alex
P.S. The Smart Money is moving out of the Magnificent Seven… And into these little-known AI stocks instead.