Blue Bell PWM


Tax Planning Can Improve Your Investment Returns

Scott Miller, Jr.

Scott Miller, Jr.

Managing Partner

November 21, 2014

It is obvious that you enjoy earning profits from your investments. It is also obvious that very few investors enjoy paying taxes on their investment gains.  One aspect of investing that should not be overlooked is tax loss harvesting.  Tax loss harvesting is the process of reducing the taxable amount of a portfolio by offsetting realized gains by selling positions with unrealized losses.  This process will reduce your realized gain, which should never be used to judge results but can boost after-tax results.

One advantage of investing in equities is that the profits you earn from the rise in the value of the investment are not due until you actually sell the position.  Another advantage is that as long as the investment is held for over one year, the profits are taxed at a rate which is lower than what you would pay on your earned income.  This is counter-intuitive to many as your hard-earned income from your job is actually taxed at a rate which is higher than long-term capital gains earned from stocks.   Long-term capital gains are also taxed at a rate that is lower than the income received from bonds and CDs.  On the other hand, short-term gains (investments held for less than a year) do not receive this favorable tax treatment and should be offset when possible.


The first goal of tax harvesting is to eliminate short term gains (where you pay ordinary income tax rates) in favor of long term gains which have more favorable rates. These rates can be as low as 0% to a maximum of 23.8% for those individuals in the maximum tax-rate bracket of 39.6%. Most tax preparers encourage tax loss selling as a way to reduce a client’s overall tax bill even though the extra transactions may cause them some additional work.  If you are working with a tax preparer that questions the process or complains about the number of transactions, you may want to find a new tax preparer.  It is also important to remember that tax loss selling will reduce your realized gains, something that most tax preparers understand and encourage. However, if you find an accountant that attempts to use realized gains and dividends as opposed to the rise or decline of the portfolio value to judge results, you may want to re-think your accountant (especially if they try to sell you investments themselves or direct you to an outfit that may be paying them for your business).

Tax loss selling can actually create investment opportunities, especially in closed-end funds (CEF).  Remember closed-end funds have a net asset value (NAV) but are purchased like a stock at a market price.  The market price of a CEF may be above the NAV (premium) or below the NAV (discount) and we always try to buy closed-end funds at a discount to NAV.  Other sellers from across the market looking to reduce taxes may cause discounts on CEFs to temporarily expand.  This creates a prime buying opportunity and something we will take advantage of if the opportunity presents itself.

The goal of postponing taxes and attempting to limit gains to long-term is well worth the effort, but due to complicated tax laws, is not always achievable. The fine point of tax loss harvesting includes the wash sale rules. These limit losses for those buying and selling the same security within a thirty day period. This is not always a bad thing but one we consider in all our transactions. There is no limit on the amount of capital losses that can be applied against capital gains, and if total losses exceed total gains a maximum of $3,000 can be applied against ordinary income tax.

While we do our best to keep your taxes at the most favorable rate it is not always possible which may be a good thing as long as there aren’t any losses.  Your help is also needed so please contact us with any special considerations or other tax obligations you may have. It is important that you let us know if you have any tax loss carry forwards, capital gains from selling a property or other capital gain or loss items that we should keep in mind this time of year.

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Tax Planning Can Improve Your Investment Returns

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