Strategies to avoid capital gains, especially short-term capital gains

[LearningMachine]

What are some strategies folks use to avoid capital gains in taxable account, especially short-term capital gains? 

For example, 

• #1. Hold forever so that you can keep automatically invested what you'd have paid in taxes.
• #2. Wait for capital gains to become long-term and then sell, and pay your share. 
• #3. Buy options expiring within the tax year that you are willing to lose money on up-to your short-term capital gains.
• #4. Opportunity zone investments at high risk of capital gains being even higher when those investments pay out. 

Any other 100% legal strategies?

How many folks end up using #1, #2, #3, #4 or any other strategies? 

Edited June 4, 2021 by LearningMachine

[LC]

The only one I can really think of is shorting another highly-correlated-but-not-too-similar asset. But then again it's difficult to find such an asset. 

[Gregmal]

I personally never let taxes influence a buy or sell. If something is worth buying, buy it. If its time to sell, sell it. Part of being successful is paying taxes. Its just part of the game. Wonder how many people held GE or old GM way too long because they didnt want to pay taxes? 

[maplevalue]

Donate things with large capital gains. In Canada you get full tax receipt and pay no capital gains tax.

[NoCalledStrikes]

Other than if I expect ahead of time that the investment will be ST and I put in my IRA, I don’t have any suggestions.

The best way to optimize for taxes is to just buy quality stocks with a long runway.  But if like me, you still buy the occasional 60 cent dollar then when it reaches 90 cents, you gotta sell, pay your taxes and move on.   That’s just the rules of buying cigar butts because they may not have a second puff left in them while you wait for the earth to complete its orbit around the sun.

[NoCalledStrikes]

5 minutes ago, maplevalue said:

Donate things with large capital gains. In Canada you get full tax receipt and pay no capital gains tax.

In U.S., donation of appreciated stock is also subject to ST/LT distinction 

 If you donate stocks you have owned less than one year, they will be considered short-term capital gain property. ... If you donate them, you will avoid this tax; however, your deduction will be limited to the lesser of their fair market value and the amount you paid for them.

If you cross the LT time period, your deduction will be based on fair market value.

 

[DooDiligence]

1 hour ago, Gregmal said:

I personally never let taxes influence a buy or sell. If something is worth buying, buy it. If its time to sell, sell it. Part of being successful is paying taxes. Its just part of the game. Wonder how many people held GE or old GM way too long because they didnt want to pay taxes? 

100% agree. I wouldn't mind paying $1,000,000 a year in taxes.

[SharperDingaan]

I must have gone to the wrong schools 

Apparently, you people have never heard of 'wash trading'? Sell your dog today to crystalize the tax loss, buy the dog back 32 calendar days later. Apply the tax loss against tax gains , and keep the tax otherwise owed.

SD

 

[TwoCitiesCapital]

Harvest losses along the way that you carry-forward and use to offset short/long-term gains when taken. 

[thepupil]

I try to be tax aware...but often risk/reward changes substantially in a <1 yr time frame and I act. I try to be tax efficient, but a shortcoming of my process vs exclusively long term high quality buy and hold is tax inefficiency...in 2021, I'll owe about 7% of my taxable net worth in taxes from investment (if nothing changes). 

 

For US people, I think that having a job w/ a good match and switching jobs to take control of your 401k via rollover is the best way to be tax efficient and creat material portions of your net worth that are tax agnostic. about 65% of my portfolio is not subject to interim taxation and a chunk of that is roth/hsa/not subject to any future taxation under current law. 

 

I have done everything on your list, to which I'd add

 

- "highly correlated non identical pairs": long $100 of Naspers/Softbank in IRA, short $50 of 700HK/BABA in taxable. markets go up over time, cover shorts to generate losses/ re-enter after 30 days. can do this with a variety of instruments, obvioulsy should make sense from an investment perspective first and foremost. 

 

- specific shares: tax planning 101 but since you didn't mention it. Example. Started buying BSM at $10-$11, bought all the way down to $5 or whatever it fell to. When it gets to $7/8 and you haven't touched it w/i 30 days, trim by selling the specific shares purchased at $11 to generate losses (or if it's a low realized gains year, trim the shares that have gains). I tend to buy stocks as they fall so there are many positions that end up like this, though I don't purposefully buy stocks I think will fall before they rise. as a twist on the above, you can also add to losers (that you're confident in) in your non-taxable accounts then sell these to trim on the way up. 

 

- On your #3, I do find that I'm a little more willing to take small risky bets when it's a big realized gains year. I don't think this is necessarily rational. your tax rate on speculative wins will also be higher. it only is somewhat rational if the gain on the speculative win can be deferred (through exercise and then holding the position for example). 

 

Edited June 8, 2021 by thepupil

[Fitz]

I have considered loss harvesting or wash sale's, but personally feel like it would take my investing style in a direction that I wouldnt understand as well. What would happen to me if I bought at $10, sold at $5 and 32 days later it was at 7? I got $5 dollars of losses sheltered, at long term gains tax rate of 20% would be worth $1 dollars and missed out on 2 dollars of gains, and a lower basis? DId i win?. I feel like I wouldn't know how to act as my buy/sell decisions would be influenced not by the long term value of a business but the short term fluctuations of my holdings. I know I would be unsuccessful. 

[Jurgis]

Just learn from the best:

 

[fareastwarriors]

As a "real estate professional," I barely pay any income taxes and have 10 of thousands of losses carry forwards.

[hasilp89]

4 hours ago, fareastwarriors said:

As a "real estate professional," I barely pay any income taxes and have 10 of thousands of losses carry forwards.

anything other than depreciation (or any irregular depreciation strategies) you would care to share? For our properties we typically only see the benefit in year 1 (where any accelerated/special depreciation is larger than income) after that we’re paying up.

[SharperDingaan]

10 hours ago, Fitz said:

I have considered loss harvesting or wash sale's, but personally feel like it would take my investing style in a direction that I wouldnt understand as well. What would happen to me if I bought at $10, sold at $5 and 32 days later it was at 7? I got $5 dollars of losses sheltered, at long term gains tax rate of 20% would be worth $1 dollars and missed out on 2 dollars of gains, and a lower basis? DId i win?. I feel like I wouldn't know how to act as my buy/sell decisions would be influenced not by the long term value of a business but the short term fluctuations of my holdings. I know I would be unsuccessful. 

Keep in mind that a 'wash trade' is 3 separate strategies acting together, it is NOT a once-and-done. 

1) EXPOSURE. Buy/hold of the same security over the long-term, via a series of entries/exits - NOT a single buy/hold. Sell when you are down X% on your cost base, pay off your debts, buy again when you see evidence of improvement. Manage your exposure, and raise cash by reducing your tax bill. 2) TACTICAL. Execute by early November so that the wash period is over by early December. Buy back slowly in late December when others are tax-selling in a 'thin' market.  Raise your sharecount and lower your cost base. 3) STRATEGIC. Lot of companies pay an annual dividend tied to year-end results. Buy the tax-loss selling dividend payer in late December, hold through record date, sell and repay debt/reinvest in your buy/hold. Collect a year of dividends, on maybe 4-6 weeks of exposure.

 

SD

 

 

 

 

 

[fareastwarriors]

On 6/9/2021 at 4:04 AM, hasilp89 said:

anything other than depreciation (or any irregular depreciation strategies) you would care to share? For our properties we typically only see the benefit in year 1 (where any accelerated/special depreciation is larger than income) after that we’re paying up.

 

Nothing special. I just try to buy 1 property a year so a lot of initial expenses to deduct. I'm also in the SF Bay Area so my cash flow is barely positive for some places. The appreciation is what I count on. Then I cash out refi and buy another. Rinse and repeat. 

[hasilp89]

2 hours ago, fareastwarriors said:

 

Nothing special. I just try to buy 1 property a year so a lot of initial expenses to deduct. I'm also in the SF Bay Area so my cash flow is barely positive for some places. The appreciation is what I count on. Then I cash out refi and buy another. Rinse and repeat. 

cheers - if you're selling though you're just deferring the taxes right - depreciation reduces basis over the years and upon sale you're taxed on the appreciated selling price less basis. Still a great strategy.

[fareastwarriors]

21 minutes ago, hasilp89 said:

cheers - if you're selling though you're just deferring the taxes right - depreciation reduces basis over the years and upon sale you're taxed on the appreciated selling price less basis. Still a great strategy.

 

Very true but I don't have plans to sell yet. I'm only in my mid-30s.  I also don't have a W-2 job so if even I sell, I have a pretty good control of my income for the year. 

 

Maybe when I get older, I will have to employ some fancy accountants to help.

 

 

I'm not saying this is a great/best strategy. It just works for me. I think I'm doing okay so I keep doing it . 

 

 

Edited June 10, 2021 by fareastwarriors

[hasilp89]

5 hours ago, fareastwarriors said:

I'm not saying this is a great/best strategy. It just works for me. I think I'm doing okay so I keep doing it . 

Nah more power to you man. I’m only asking questions cause my accountant (he is definitely not fancy) is always pushing back on me when I ask him the same question every year “are you sure there’s nothing else I can do to save on taxes?” Just tryna see what else is out there. Maybe I just need a new accountant

[Fitz]

I have several rentals and try to make as many items as imaginable "repairs" and expensed in the year occurred vs capitalized over the useful life of the improvement. That is one area you can help to keep your taxable income low with rentals, it's kind of the opposite of how all these high flying pubic companies run their books, so in some sense it may be a nice balance for the accounting world  

 

Not saying anyone does this in the real world, but  some people who have rentals, expense costs associated with their primary residence, like repairs or maintenance against one of the rentals.... never met anyone like this, but have heard they are out there...

[TwoCitiesCapital]

On 6/8/2021 at 9:27 PM, Fitz said:

I have considered loss harvesting or wash sale's, but personally feel like it would take my investing style in a direction that I wouldnt understand as well. What would happen to me if I bought at $10, sold at $5 and 32 days later it was at 7? I got $5 dollars of losses sheltered, at long term gains tax rate of 20% would be worth $1 dollars and missed out on 2 dollars of gains, and a lower basis? DId i win?. I feel like I wouldn't know how to act as my buy/sell decisions would be influenced not by the long term value of a business but the short term fluctuations of my holdings. I know I would be unsuccessful. 

 

This will inevitably happen. And if you only focus on the one time it does happen, then you're value of tax loss harvesting will ALWAYS be negative. 

 

But if you're doing this regularly across the portfolio, you'll also have instances where you're buying back in lower or the at the same price (both of which are probably more likely since we know momentum tends to persist). And the tax savings in aggregate will probably be worthwhile even if a few of the trades go poorly. 

 

Treat it as a system instead of a one-off trade.