Creating guaranteed tax loss?

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unknownfuture
Posts: 46
Joined: Fri Feb 15, 2019 3:30 pm

Creating guaranteed tax loss?

Post by unknownfuture » Mon Jan 13, 2020 5:25 pm

Hi all,

Earlier in January 2020 I sold shares in my taxable account, with capital gains.

Naturally, to avoid taxes, I'd like to end 2020 without any capital gains.

I just thought up the following trick to generate an almost guaranteed tax loss for 2020:
With new money, instead of buying an index ETF, buy the following two ETFs:
- With 75% of the money, buy a 2X leveraged index ETF.
- With 25% of the money, but a -2X leveraged index ETF (i.e. inverse)
- Note that (75% * 2 + 25% * (-2) = 1), so this 75/25 portfolio is equivalent to 1x the index, minus costs.
- At the end of 2020 (or whenever there's a signicant upturn/downturn): tax loss harvest with the ETF that generated a loss.

See e.g. this portfolio visualizer link:
https://www.portfoliovisualizer.com/bac ... tion3_2=25
Portfolio 1: 100% QQQ
Portfolio2 : 75% 2x QQQ, 25% -2x QQQ

One could do something similar with 3x ETFs.

Downside of the approach above is that the leveraged ETFs incur various additional costs, which can offset the tax loss harvesting benefits.

Anyone aware of more efficient / less costly ways to generate tax losses, while staying fully invested?
Last edited by unknownfuture on Mon Jan 13, 2020 5:39 pm, edited 1 time in total.

dukeblue219
Posts: 52
Joined: Fri Jan 29, 2016 12:40 pm

Re: Creating guaranteed tax loss?

Post by dukeblue219 » Mon Jan 13, 2020 5:28 pm

Leveraged ETFs are only good intraday and may not track well long term (beyond a few days).

Otherwise there would be a great strategy: put half your money in any +3X and half in its opposite. Over the longterm one would go to zero (a fixed loss) while the other would triple. You'd win either way.

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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Creating guaranteed tax loss?

Post by FiveK » Tue Jan 14, 2020 12:00 am

unknownfuture wrote:
Mon Jan 13, 2020 5:25 pm
Naturally, to avoid taxes, I'd like to end 2020 without any capital gains.
Careful not to let the tax tail wag your net worth dog.

For your long term financial well being it would be better never to have any losses, only gains. :)

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anon_investor
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Re: Creating guaranteed tax loss?

Post by anon_investor » Tue Jan 14, 2020 12:11 am

If you itemize your taxes, make a generous donation!

luckyducky99
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Joined: Sun Dec 15, 2019 7:47 pm

Re: Creating guaranteed tax loss?

Post by luckyducky99 » Tue Jan 14, 2020 12:55 am

unknownfuture wrote:
Mon Jan 13, 2020 5:25 pm
- At the end of 2020 (or whenever there's a signicant upturn/downturn): tax loss harvest with the ETF that generated a loss.
Except, when you harvest the losses, I think you also have to sell the winner, for an offsetting gain, otherwise you now have one-sided 3x exposure and your risk profile is way off. You can't just re-buy the loser because you will create a wash-sale and your loss is no longer a deductible loss.

I guess you could try to dance around with similar but not "substantially identical" long/short positions to avoid that, but that sounds like a pain, and there is real risk that they end up not being similar enough, and you face-plant when something unexpected happens.

I think if there were an easy and safe way to generate synthetic capitol losses, lots of people would be doing it and it would be well known. I don't think there is.

medic
Posts: 50
Joined: Thu Jul 18, 2019 11:30 am

Re: Creating guaranteed tax loss?

Post by medic » Tue Jan 14, 2020 1:20 am

How much gain are you talking about and are they LTSG or STCG (at what rate)?
One option is a QOZ fund which can let you offset/avoid the paying the tax gain entirely. It's a long term play.

Topic Author
unknownfuture
Posts: 46
Joined: Fri Feb 15, 2019 3:30 pm

Re: Creating guaranteed tax loss?

Post by unknownfuture » Tue Jan 14, 2020 5:23 pm

medic wrote:
Tue Jan 14, 2020 1:20 am
How much gain are you talking about and are they LTSG or STCG (at what rate)?
One option is a QOZ fund which can let you offset/avoid the paying the tax gain entirely. It's a long term play.
Highest bracket in CA, and it's both long term and short term gains.
STCG 54.10% (!!)
LTCG 37.10%

I'll take a look at QOZ funds, thanks!

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