Death and Taxes - Capital Gains Version

Inevitably, while we are definitely long term investors, there comes a time when we deem it appropriate to sell companies that have done extraordinarily well for us over many years (even decades in some instances).  We painstakingly consider the ramifications of these actions as it relates to capital gains taxes for those who own these companies in taxable accounts.  While the long term capital gains tax rate for federal income taxes is preferential to income taxes (20% for most investors), in high tax states like California where capital gains taxes are taxed at the same rate as income, the bite that the government takes is significant (13.3% at the highest rate, which is most of our clients).  Add in the Obamacare surtax on capital gains which most of our clients are subject to as well (additional 3.8% on capital gains) and the damage is simply painful.

Nonetheless, as they say: "death and taxes"... the only certainties in life!

This is where we cue our long standing response to the concerns about capital gains taxes: "Write your congressman"!  And while we definitely think each client subjected to such taxation should regularly complain to their representatives in Congress about how poorly they appropriate our money, we understand that seems to fall on deaf ears these days; especially in California!

All that aside, we emphasize that we absolutely MUST consider the investment merits of our decisions first and foremost, and relegate tax-related decisions to second place.

We use tactics throughout the years to minimize capital gains taxes by harvesting losses when and where we deem it appropriate, from an investment standpoint.  Most of the time that involves buying more of a loss position, waiting 31 days (so as to avoid wash sale rules) and then selling the original shares that were purchased at higher prices and carry losses.  Not surprisingly, oftentimes that results in losses being completely wiped out (buying low...!), but who's complaining if that is the outcome?  It is an effective tactic for realizing losses while still maintaining a position in a company that we believe to be temporarily impaired.

Additionally, when considering tax-loss harvesting, we almost never wait until the end of the year to practice such maneuvers.  It is then that most novices are taking tax losses, and we would much rather be in the position of buying those shares from people that are making poor investment decisions to save on taxes.  In our experience, those folks are usually falling into the "penny-wise and pound-foolish" trap.

One of the concerns that investors have is that they often don't know where they stand throughout the year with respect to realized capital gains and can end up in tax penalty situations for lack of withholding in the tax year.  Here, we note that every custodian we work with provides that information, generally on the front page of the statements, each and every month of the year.  We urge clients who have that concern that they monitor those monthly statements, or even have their tax advisers do so on a periodic basis throughout the year.  However, it is important to note that those realized gains/losses can change rapidly throughout the course of the year as conditions on the investment side of the equation (the most important side) change.

We have been most fortunate to have the types of above average returns for our investors that have created such problems as capital gains tax liabilities.  While we wish the government were more frugal and less willing to confiscate our money that we first earned, and pad taxes, and the risked, made money, and paid taxes, we are not holding our breath.  Long-time readers of our writings know that we believe the economy would be much stronger if the government didn't spend money at the frenetic pace that it does, but we get by in spite of such profligacy, and will continue to do so!

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.
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