Many of the stocks that lose the most in a given year will jump after tax-loss selling ends.
It’s not as easy as it might look to tax-loss harvest your lost stocks in less than two weeks.
Getting rid of a loser by December 31 is the easy part of selling for tax losses. You can use the loss to lower your 2024 taxable capital gains as long as you keep the stock in a taxable account.
The tricky part comes when you think that your stock is still a good investment even though it lost money. For 30 days after selling shares or a “substantially identical” security, the IRS’s “wash-sale rule” says you can’t buy them back. This is because you want to use the loss to offset your capital gains. Of course, you won’t get to enjoy any of the stock’s gains during those 30 days.
It’s not just an idea that being out of stock for 30 days is wrong. A lot of the stocks that lose the most money each year will go up after people stop selling them for tax losses. That means there’s a real chance you won’t see your stock go up again while you’re away from it.
One way around this might be to buy a similar stock to the one you’re selling, hold on to it for 30 days, and then swap it out for the one you’re selling. As long as the replacement stock works about the same as the original, you won’t lose much during the 30-day wash-sale time, and you can still use the tax loss.
Keep in mind that the new stock you use can’t be too much like the old one. This is a big problem when you’re looking to get tax breaks by selling exchange-traded funds (ETFs) instead of stocks. For example, if you wanted to sell the SPDR S&P 500 ETF SPY -1.05%, you couldn’t trade it in for the Vanguard S&P 500 ETF VOO -1.04% because they are very similar. But because the IRS hasn’t made it clear what a “substantially identical” security is, you might want to talk to a financial advisor and/or a tax lawyer to be sure.
With individual stocks, it’s likely that you can get around the IRS’s wash-sale rules, as long as you’re not trying to swap out one share class of the same company for another. For instance, you can’t trade in Berkshire Hathaway Class B BRK.B -0.56% stock for Class A shares BRK.A -0.39% and expect to get a tax break.
Aside from those rare cases, it’s pretty easy to find another stock that will behave similarly to the one you sell for less than what you paid for it. Start at the bottom of a list of stocks ranked by how well they’ve done so far this year. (There are a number of services that keep lists of year-to-date returns up to date.) Find a stock in the same business as the one you own that has lost about the same amount of money. There is a good chance that both will do about the same over that 30-day time.
Take Halliburton Co. HAL -0.04% as an example. It is an oil services company and its stock was ranked 470th out of the 500 stocks in the S&P 500 Index SPX -1.11% in terms of its year-to-date success earlier this week.
Another oil services company, Schlumberger SLB +0.19%, came in 471st place with a result that was almost the same so far this year. (Look at the picture above.) You might be able to get the tax loss back and lose little to no of the return you would have gotten if you hadn’t sold Halliburton. This is especially true if you swap Halliburton for Schlumberger for 30 days.
That being said, you might not always be able to find a similar stock. If you can’t, you could look for an ETF that is matched to the stock you’re selling in terms of business and sector. Visit the Select Sector SPDRs page and use the “Correlation Tracker” tool to help you. When you type in the ticker symbol of a stock, the tool tells you which Sector SPDR ETF has the best correlation coefficient. The stronger the correlation, the more likely it is that you can use the ETF instead of the stock you just sold during the 30-day time.
It might still be worth it to get your tax loss even if you can’t find the right replacement. For example, if you’re in the 20% tax band, selling your losing position can cut your tax bill by up to 20% of the money you make. That is a real win.
