I think that most of us have seen some pretty nice gains in 2021 with a stock market that continues to climb to all time highs. This is great, but please don’t close the books yet if you aren’t familiar with tax-loss harvesting.
Because tax loss harvesting is one of those little known investment strategies which can save you a lot of money over time. And I think that it works for most of us, because this strategy is related to your realized capital gains this year.
Most European countries, like Poland (but unlike the Netherlands), allow you to offset your realized capital losses with realized capital gains. In other words, any profits you made on selling some of your shares or on option trading might be eligible for this investment strategy.
So let me briefly clarify the strategy first, before sharing with you my practical example.
How tax loss harvesting as an investment strategy works
It’s actually pretty easy!
Positions in your portfolio that have an unrealized loss are sold to allow it to credit against realized gains made earlier in the year. The money you received from selling those stocks is then redeployed into stocks with a similar profile to maintain your portfolio expected risk and return levels.
As an example:
If you made 1000 Euro profit by selling shares in L’Oréal after the recent run-up, then you could decide to sell some or all of your shares in Danone until you realized a 1000 Euro loss on that position (which is a very valid scenario for me 😅).
In this case you would avoid paying a capital gains tax, because in the end of the year you wouldn’t have made any profit on the total of your sale transactions.
In the meantime you could redeploy the cash from selling your Danone shares into for instance shares in Unilever. This way you could continue to keep your portfolio’s dividend yield at the same level.
And this is exactly what I’ve been doing over the last 5 years and what I will continue to do this year as well.
My tax-loss harvesting plan for 2021
This year I realized capital gains on the following transactions:
- Sold British American Tobacco at a 10% profit (missus doesn’t want tobacco in our portfolio)
- Sold SAP at a 20% profit (cleaning up portfolio – too small)
- Expiration of 2 very profitable Royal Dutch Shell call options
- Worthless expiration (thus at a profit!) of several put options I sold (Ahold, BASF, Total Energies, Unilever)
The total of this is more than a 4 digit figure for me and I really don’t feel like paying taxes on it.
This is were a diversified portfolio comes to the rescue!
Because I don’t know how it is for you, but I always have a few positions in the red. Especially when those are relatively new!
Prices just tend to drop right after I buy the stock 😁
Hence, this year I decided to sell my position in Alibaba at the New York Stock Exchange and repurchase them back at the Hong Kong stock exchange.
This way I will offset my realized capital gains with a realized loss in Alibaba. At the same time it will allow me to mitigate the US delisting risk for Chinese stocks.
I honestly don’t see it as a high risk for a company like Alibaba, but the market sentiment is definitely there for it. If it happens, I rather expect it due to regulations announced by US policy makers than Chinese policy makers.
But hey, this is actually it. This is how I will be using the tax-loss harvesting strategy in 2021.
Are you doing something similar? Or are you not really familiar with it?
If not, please find below some additional frequently asked questions which people have asked me in the past.
European Dividend Growth Investor
Please check your local tax code at all times. The content in this article is of generic nature and differences in principles might apply based on your tax jurisdiction.
Frequently Asked Questions
Tax-loss harvesting is the selling of stocks at a loss to offset a capital gains tax liability.
Only if you have realized capital gains and if you live in a country with a tax policy that allows for this strategy
Usually not, dividends are typically seen as income, not a capital gain.
In most of the countries you can carry (some or all) losses forward into the next (several) year(s).
Yes, in some countries, like in the United States, you may have to wait a certain amount of time until you can buy the shares back again (i.e. 30 days).
In some countries you can not repurchase a stock within 30 days after realizing a loss on that exact same stock (i.e. the US). It is called a wash-sale in case you do repurchase it back within 30 days.