This is the first year I’ve ever had the opportunity to use tax loss selling, so I’m seeking out as many opinions as I can. Here’s the scenario:
For years my wife participated in an employ stock purchase plan, where she was able to buy stock at a 15% discount, on the condition that she had to hold it for one year. The result being that she accumulated a ton of company stock.
Technically the account has a net positive return because of the fixed value investing over all those quarters (including during the bottom of the recession), and because of the 15% discount. But the company stock price is down almost 20 points from when she first started.
Over the same period, her company also rewarded her with stock options that she could cash in if she stayed with the company more than 4 years (and if the stock price was above the reward price). Most of these are completely worthless because of the drop in stock price.
And lastly, over the same time period I’ve been making short term investments and doing really well at it.
So now after 5 years, the three parts are coming together: I’ve made a lot off of short term investments and she’s managed to cash in some of her options, both of which are going to hit us hard at tax time.
The third rail to the equation is that we are currently holding all this company stock, some of which could be sold at a loss, and used to offset the other two gains.
On the surface it seems like a great idea, what am I missing? Right now the biggest problem is to avoid the wash sale rule, but other than that we should be good to go.
It does seem like a good opportunity for tax loss harvesting by selling those company shares that your wife purchased at a higher price than the current share price. These losses will indeed offset the equivalent amount of gains.
All you have to do to avoid the wash sale is not buy any more company stock in the 30 days following the sale.
I am a bit puzzled by your point number 2, though. I don’t see how worthless share options fit into this scenario at all.
The future direction of the company stock is not really relevant. There is a definite gain to be made by tax-loss harvesting now. Most experts recommend minimizing your exposure to company stock anyway, but if he or his wife did want more, they can always buy some in 30 days time. Or exercise some of those options when they get out from being under water.
Sorry for the confusion, allow me to explain it a bit better. She received stock option awards several times over the course of her employment, totaling about 1700 shares, and each time they were based on what the current stock value was at the time. So the first two sets were valued at $66 and $56 (pre-crash), those are completely worthless. She then got a third and fourth set were valued at $35 and $36 when the recession knocked the shit out of her company in 2008.
Last February the first chunk of options became available from the youngest awards, at a time when the stock price was elevated. We cashed them in as soon as they became available, 3 weeks before the stock fell again to near recession levels.
So for tax time, we’ll have that sale as a gain on our books.
Very sure. It’s not a company that I’d otherwise seek out to invest in, which is part of the reason we don’t bother with the employee purchase plan any more. It hasn’t been considered a growth stock for at least a decade, we now just hoping it stays flat.