The vast majority of my stocks are held in a taxable account. In the past I have not given much thought to the tax implications of how I manage things, though I have sort of whined about taxes.
This year may be different. I tend to actually like taxes - philosophically anyway - because it means I made money. However this year is providing me with a possible opportunity I haven't had before. So I've come up with a potential tax-loss selling strategy.
Possible Sales Options
- My cost basis for VLO is $79.76. As of market close on 9/18/20 it trades at $48.71, a nearly 40% loss.
- My cost basis for XOM is $60.80. As of market close on 9/18/20 it trades at $37.19, another nearly 40% loss.
However things are not quite that simple. Here are my buys for VLO with short vs long-term tax treatment in brackets:
- 8/1/19 at $84.08 [Long]
- 2/3/20 at $80.00 [Short]
- 2/26/20 at $72.58 [Short]
So I have the first buy which would receive long-term capital loss treatment and the two more recent buys which would receive short-term, and more beneficial, capital loss treatment. I suspect that if I decide to sell VLO - provided it's still trading at roughly where it is today - that I would sell everything. Long or short, tax benefits would be significant.
For XOM things become more complicated. I own some in my Roth which is not part of this conversation. In my taxable account, buys are:
- 12/18/18 - $73.09 [Long]
- 12/19/19 - $69.52 [Short]
- 7/24/20 - $43.51 [Short]
Right now I'm looking at selling the first two sets of XOM shares and continuing to hold those bought in July.
Each company has a November ex-div date but has not announced yet. So sales would come following those dates. This will likely be early in the month for VLO, mid-month for XOM.
The date to keep an eye on will be the 12/19/19 purchase date for one of my XOM buys (I bolded it for this reason). On this date that buy will go from being a short-term to a long-term holding (in the eyes of the IRS). I will need to sell at some point between the November ex-div date and December 19. And because transactions sometimes take a day or two to close I'll want to sell a few days earlier - probably by Monday, December 14. I also could sell the most recent purchase but the share price would need to drop significantly below where it is now for the tax benefits to outweigh the opportunity risk of a price recovery.
Risks: There's really only one - that within 30 days of selling either company's price really pops in case I want to buy one or both again. To avoid wash sale rules, I can't buy after selling at a loss for at least this long. I guess another risk is that their prices recover between now and their next respective ex-div dates but if they do they do. This would actually be my preference as it would indicate a nice economic recovery over the next two months. The tax-loss benefit, if it happens, will be nice but nothing compared with an improved outlook for my investments. I didn't buy either company with the goal that their price would tank and I could get a tax benefit.
I don't consider either company to be a bad long-term investment. I think there's a chance they could cut their dividends but I also think each would work to try to restore it as quickly as they can. However I've decided that energy (at least fossil fuels) has enough near-term uncertainty that I won't be adding more for the time being, even at discount prices - though I'm swearing off this statement for the Roth; I think XOM right now is a pretty decent 2-3 year capital gain play. Since I won't be adding more now, and since I think the dividends are risky, why not use the US tax code to my advantage?
Another consideration is that after January 1, I can put $7,000 more into my Roth. This is not a deciding factor, or much of a factor at all. But raising cash for this is convenient.
As of today these are the only companies I own that offer a significant benefit for tax-loss selling. This can obviously change between now and New Years' Eve but this is the plan now. And being a planner, I like having this thought out 3 months before I'd need to execute it rather than waiting until December to consider it. Obviously, share price movement this fall could have a big impact.
In any case, I was thinking of how I want to manage this today and wrote out my plan. Since I did that I thought I'd throw up a blog post up about it.
I do have a question. If I sell XOM at a loss in my taxable account on, say, December 14, do I trigger a wash sale if I buy it right after January 1 in my Roth? I'll look this up myself at some point but suspect someone reading will know.