Tax strategy Investing

[jobyts]

Specific to US residents:

 

Say, my salary is 100K and I come in 35% tax bracket. (for ease of calculation, I could use flat 35%).

The tax I need to pay for 2 years =  35K + 35K = 70K

 

Say, I have 1 million to invest: I buy SPY for 500K, and SH for 500K, on Jan 1st.

Assuming that year a fluctuation of 10%, I sell one that I lost 10% money on Dec 31st and I sell the one I made 10% gain on next year Jan 2nd.

 

Investment loss I have on the first year = 50K

My effective tax on the first year = (100K - 50K)*35% = 17.5K

 

Investment gain I have on the next year = 50K

My effective tax on the next year = 100K*35% + 50K*20% = 35K + 10K = 45K

 

My total tax for 2 years = 17.5K + 45K = 62.5K

 

Is this too good to be true, saving few percentage every year with no risk?

[thepupil]

as i understand it, you don't deduct investment losses from your income (except for max $3K/year).

[aws]

Not only does that not work because of the 3k limit, but it would also be considered a straddle which has special rules for deductions.  When you have a straddle you have to reduce your loss by the amount of the unrecognized gain on the offsetting position.  If they were perfect offsets you would always have no deduction.

[smreitz]

Yes...too good to be true!

 

Income tax rules on capital losses are not very forgiving (i.e. $3,000 of capital losses deductible against ordinary income limit).

 

I think you also need to keep in mind meeting holding period requirements (long term vs short term) and potential wash sale rules (selling stock for a loss and buying it back within 30 days).

[bargainman]

On a related note look up tax loss harvesting.

 

https://www.wealthfront.com/tax-loss-harvesting

 

not the same but interesting technique.