Part of smartly playing the stock market is having a profitable exit strategy that offsets losses against appreciated investments. Let’s discuss.
Investors must first decide whether a given play is going to be long- or short-term. Everybody has their own investment methods and risk-reward appetite; regardless, it’s important to calculate taxes into your formula. Keep in mind that long-term capital gains taxes are 15%, compared to short-term capital gains taxes, which can be as high as 39%.
For example, if you buy $10,000 worth of stock in a company and it rises 25% in one month, you’d enjoy a healthy $2500 return. Now, let’s assume you’re able to repeat the success and your next investment nets $6,000 on a $12,500 investment. At this point, you are jumping up and down!
You’ve almost doubled your money – and who wouldn’t want to celebrate that?! You now have $18,000. That’s an extra $8,000 on your $10,000 investment! However, before you plan a family vacation, consider this: You may owe around $3400 in taxes, thanks to short-term capital gains.
Now, for investors willing to wait years on a tech company to potentially rise exponentially –the same $10,000 investment, over several years, if left alone, could mushroom into $100,000…and by the time you sold the stock, the long-term capital gains would only be 15%.
This isn’t meant to be an endorsement of one strategy over another. We’re simply pointing out that long-term holds have a better tax rate. Of course, every investor has their own approach, but these are facts to keep in mind.
Diverse portfolios make the most sense and ensure a certain amount of financial stability. For those who never invest more than they can handle – which is recommended – tax harvesting might be the perfect move.
For example, let’s say your business is doing very well. On top of your business doing well, you also own some real estate that has risen in value. Moreover, you did well in the Forex market and even managed to buy bitcoin and other cryptocurrencies at the perfect time. Good for you! You’re even pleased to find out that the family house has appreciated in value tremendously. Your financial future is gleaming!
However, you did make a few mistakes. Namely, a biotech stock, in which you invested, caught a bad break and you’re down $5,000. Your friend recommended it; he lost even more money; now you doubt you’ll ever see that money again. He is trying to convince you to hold on another year, but the latest headlines aren’t inspiring.
Since everything else in your portfolio is going well, why not just sell the stock? Well, you still believe that if the company gets the right investor, exposure, or cash injection, that it can be a game-changer. This puts you in an interesting situation. Since you’ve lost $5,000 already, you can actually sell the stock and claim that capital loss to offset your other income. After all, you have made that money back through other parts of your portfolio, so why not? You might decide to sell half of the stock, to take a $2500 loss that can be used to offset your other income so that you still have stock that could rise later.
Our team is excellent at assessing portfolios for tax positioning purposes. If you’re looking to leverage gains against losses and make the best of the new tax law, get in touch today. We have the investment law experience you need, with both traditional and cryptocurrency portfolios.
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