Daniel’s Story

Daniel is a savvy investor. He takes the time to monitor his investments and proactively make changes when necessary. Presently, Daniel has invested $160,000 in various index funds, but also holds $50,000 inside an individual stock.

The stock has performed quite well, but the index funds haven’t because he purchased them just recently. Unfortunately for Daniel, he’s looking at roughly $20,000 in unrealized losses. But being the savvy investor he is, Daniel realizes he can use these losses to his advantage. 

Daniel knows if he sells $20,000 worth of his well-performing stock, he’ll be subject to a capital gains tax. But he also knows he can reduce his overall tax liability by using tax loss harvesting. If he sells $20,000 worth of his index funds at a loss, it will offset some of the gains of the individual stock.

But Daniel’s not sure if this is the right move. He’s also unsure of the tax implications of reinvesting back into the same stock or index funds at a lower valuation. So before going through with anything, Daniel reaches out to Crafted Finance for a second opinion. 

Crafted Finance’s Solution

Before deciding what to do, Daniel needs to gain clarity on what he’s trying to accomplish. We help him do this by running through a series of questions he should answer before moving forward. They are as follows:

  • Question 1: Do you need the cash created from the sale of the stock or index funds? 
  • Question 2: If not, do you need to diversify or rebalance your portfolio?
  • Question 3: Are you selling the stock because you feel over concentrated in that position, and want to reduce your risk?
  • Question 4: Is the stock something you want to hold for the long-term? 

Tax advice is irrelevant if Daniel’s investment decisions aren’t aligned with his values. In every case, there needs to be an understanding of what the money is going to be for, how long the time frame will be, and how much risk is appropriate between now and then. 

After going through these questions, we walk Daniel through the tax implications of various options. Daniel can harvest tax losses and stay a long-term investor in the stock/index funds. If he sells an investment and waits 30 days to buy it back, he’s still allowed to count the tax losses he’s realized. But if he buys it back before then, he can’t as per the “wash-sale rule.”

Another option for Daniel is to find a similar proxy to invest in. For example, let’s say Daniel was invested in the iShares S&P 500 index fund (ticker IVV). He could sell those shares, lock in the tax losses, and immediately put the money into Vanguard’s S&P 500 index fund (ticker VOO).

This retains the portfolio's diversification and allows him to secure the tax losses without having to wait 30 days. But before advising this, we double-check if the IRS allows this type of transaction for realizing capital losses. Most signs point to “yes.” 

After this discussion, Daniel feels confident enough to take action and sells some shares of his individual stock. As a result, he gets to bank on its success, maintain a position that may outperform the indexes, and reduce his concentration risk. Additionally, he sells shares of his index funds to harvest tax losses to offset the gains from selling the stock. 

Immediately after selling, Daniel reinvests the proceeds from each sale into similar index funds he previously owned. He also makes sure they’re manufactured by a different company so he doesn’t have to wait 30 days. This move allows Daniel to maintain his investments in the market along with his portfolio’s diversity.

If you’re struggling with a similar situation, or have other investment concerns, let’s talk! You can schedule a complimentary consultation, or reach out to us at 650-336-0598.