It’s mostly just the market fluctuations in the assets they hold, along with using leverage and arbitrage.
How much do you need to invest to generate a big loss, like $250k? What’s the return on the money invested?
In my experience, you can generate around 25% in losses on the principal in a year. The returns are based on something like the Russell 3000.
That’s a pretty good deal for loss harvesting. Any good funds you can recommend?
My advice is to take your profits and diversify. You’ll pay taxes eventually, so better to pay now and focus on capital gains going forward.
I learned the hard way after losing over $300k in the late 90s while worrying about taxes.
You’re right. It’s also better to sell when your income is lower, like in retirement.
Or better yet, pass it on to your heirs so they get a stepped-up basis and pay no taxes.
While you’re still employed, your options are limited. The first question is why you want to exit. Diversification? Need the money? Want to reinvest in something else? Here are some options:
- Equity swap: You trade future gains/losses on your stock with your broker for another asset, like the S&P 500. This lets you diversify without selling, but it might be against your company’s policy.
- Margin: You use some of your equity to buy more stocks or get cash. It’s risky, but some companies allow it.
- Equity loans: Take out an interest-only loan against your stock. This is safer than margin but can still be risky.
- Sell options: If allowed, selling covered calls can generate income, but it could force you to sell early if the stock moves up.
There’s no magic solution. Hold your shares for at least a year to qualify for long-term capital gains rates. Maybe see if you can roll them into an IRA, but that’s outside my area of expertise.
Sounds like you’re at Apple, Microsoft, Google, Amazon, or Nvidia. In any case, sell and diversify. You don’t want to get stuck holding a bag like what happened with Nortel (check Wikipedia for that story). Ideally, keep your company stock to less than 10-30% of your portfolio.
But this doesn’t address the tax question.
The tax issue is simple: you’ll need to pay the taxes.
If you’re not at the company anymore, you might take on more risk since you don’t have job security tied to it.
My plan is to quit and then sell over the next year, keeping my adjusted gross income (AGI) low to minimize taxes. If your AGI is under $50k, you pay no capital gains tax. You could only sell about $100k a year though if you’ve got 100% gains.
The IRS will love that. Remember, capital gains count as income too. You’ll pay based on your total income for the year, so reducing your job income could help.
There’s not much more you can do beyond basic strategies like long-term gains. Talk to a CPA—most of the advice will probably sound the same, but they can help you navigate the specifics.
One financial writer said to look at it this way: having a large tax bill means you’ve made a lot of money. Just sell, pay the taxes, and reinvest in a diversified portfolio. Uncle Sam’s always going to get his share.
Instead of selling, consider taking out an interest-only loan with your stock as collateral. Then use the loan to invest in real estate or an index fund. Sell a little stock as needed to cover the loan interest.
This is a great question for your tax advisor. If you do your own taxes, it might be worth spending a little time with one just for advice.
You could borrow against your stock, use an exchange fund, or private hedging. Big financial firms can help if your position is large enough. Direct indexing is another option for broad market exposure.