Hey, I’m 25 and still figuring out some of the tax stuff around my investments. I’ve had a good year with some solid returns from options and swing trades, leading to about $25,000 in short-term capital gains. Since my annual income is over $300k, these gains are going to be heavily taxed.
Does it make sense to leverage into a broad mix of stocks and options now to hold any winners past year-end and sell off the losers to lower my taxable gains? I’m planning to make less next year, so any gains I carry over should be taxed at a lower rate. My risk tolerance is decent if the move makes sense in the long term.
Are there any big downsides I might not be seeing here, aside from the added risk?
Have you looked into direct indexing? You’d buy individual stocks in an index and then tax loss harvest the losers each month while keeping your exposure to the index. Companies offering this usually have high minimums, though.
Daire said:
What tax rate are you expecting on those short-term gains?
Around 38% from what I’ve gathered. My income puts me in a high bracket, so I need to minimize the impact.
Some people don’t realize that paying taxes on gains still leaves you with more than losing money to avoid taxes. Losing $100 to save $38 in taxes doesn’t make sense.
@Skylar
I get it; that was a joke. I’m trying to offset gains without hurting my portfolio too much. Ideally, I end the year with unrealized gains that’ll be taxed less next year.
I’d probably use margin to buy stocks or maybe options/LEAPS if they’re recommended. My margin rate is around 11%, but since I don’t plan on holding long term, I’m not too worried about the interest. Just want to shift some STCGs into unrealized gains.
Max said: @Rayne
So would you rather pay taxes on a $25k gain or avoid taxes on a $0 gain?
Honestly, this sounds risky.
To clarify, I’m thinking of buying a diverse set of stocks. Ideally, some would be winners, and some would be losers. Before year-end, I’d sell the losers to offset my tax bill. I’d hold the winners into the next year, where the gains would be taxed at a lower rate due to a lower income.
If stocks break even overall, I’ll reduce my taxable gains without much change to my portfolio. I’m already mostly invested, with few losses to offset gains this year.
If all the stocks go up, I’ll have more unrealized gains.
If some go up and some go down, I can sell the losers and reduce taxes.
@Rayne
Consider this: you buy in and lose, then sell for a tax break. Do you plan to reinvest right after to benefit from any market rebound? Without reinvestment, you risk missing future gains.
Tax loss harvesting works well if you’re already planning to buy and hold similar assets. Jumping in and out can backfire if you’re only doing it to avoid taxes, especially if prices rebound.