Tax-Loss
Selling — An Example of the Benefits
The Henssler Financial
Group Position Paper
Tax-loss selling involves selling a stock that has lost value specifically in order to realize a taxable loss. The loss can be used to eliminate taxable gains, either long-term or short-term.
Here is an example of the benefits of tax-loss selling:
Stock A is purchased at $100. It is sold six months later for $40, at a ($60) loss. Assuming 40% combined state & federal tax rate, this loss leads to a tax savings of $24. After 31 days, the $40 proceeds from the sale and the $24 tax savings are reinvested in the stock. If the stock is still priced at $40, this buys 1.6 shares (see below).
Buy
stock: | $100 | |
Sell
stock: |
$ 40 | |
Taxable
loss: | ($60) | |
Tax
savings: | $
24 | |
Reinvest
proceeds: | $64 | ($40 sale proceeds + $24 tax savings) |
$64
purchases 1.6 shares at $40 per share | ||
If stock A's price goes back to $100, the 1.6 shares rise in value to $160. If the 1.6 shares of stock A are sold again in six months at $100 per share, the investor clears $111.60, even after taxes, assuming a 40% combined state & federal tax rate (see below).
1.6
shares sold at $100: | $160 | proceeds |
Cost
basis of 1.6 shares: |
$64 | |
Taxable
gain of: | $96 | |
After-tax
net gain of: | $57 | .60 ($96 less 40% taxes) |
Plus
basis: | $64 | |
Total
after-tax proceeds: | $111 | .60 |
If the 1.6 shares
are instead held for one year, then sold at $100 per share, the investor clears
$135.04 after taxes, assuming a 21% combined state & federal tax rate for long-term
gains (see below).
1.6
shares sold at $100: | $160.00 | proceeds |
Cost
basis of 1.6 shares: |
$64.00 | |
Taxable
gain of: | $96.00 | |
After-tax
net gain of: | $75.84 | ($96 less 21% taxes) |
Plus
basis: | $64.00 | |
Total
after-tax proceeds: | $139.84 |
In either case,
the initial investment of $100 has increased in value, after-tax, to either $111.60
or $139.84, even though the stock ends at the same price it began.