If you think about it, those two concepts don’t go together. Year-end tax planning is short-term by its nature, whereas long-term planning is just what it says it is. It’s cool if you do some transactions that have a positive effect on this year’s tax bill, but you should weigh these transactions against long-term ideas and financial goals. You don’t want to save a few bucks in the short term but in the process give up the opportunity for longer term growth.
Year-End Tax Planning
This being December, it is the time of the year that many of my Financial Planner brethren pen advice about how to do stuff in order to save money on your taxes this year. Most of these pieces of advice involve selling positions that are at a loss so that these losses offset gains you may have realized with other investments. A variation on this theme is to sell a losing position in conjunction with selling a winning position that you want to get out of between now and the end of the year. Keep in mind that all capital gains and losses that you have transacted during the calendar year get rolled up and netted out to determine your net capital gains. These are good ideas, as long as you really want out of all of the positions that you sell, whether they be gains or losses.
My issue is that you really shouldn’t be selling based solely on the transaction’s affect on your tax bill. Warren Buffet doesn’t typically sell to save money in taxes, and nor should you if you still believe in your investment. Don’t make the mistake of selling a position that you believe will be a long-term success story just because you have tax issues. You will kick yourself later. If you are a technical trader looking to make short-term profits, then it is a different story, but if you are a long-term investor, and you still believe in your investment, then selling your position may not fit your long-term strategy. Now, if the story has changed, or if the stock isn’t hitting sales or earnings metrics that you would like to see, then reconsider your investment, but not solely for tax reasons. Taxes can be part of the equation, but they shouldn’t be the entire equation.
What About Musk?
Now you may say, didn’t Elon Musk just sell a few $billion of TSLA stock in order to pay taxes? Yes, he did, but his case was different. Musk had stock options that were expiring, and so he sold some stock in order to pay to exercise these expiring options. In the process, he owed taxes on the stock that he sold. Presumably he came out ahead even though he payed $billions to the IRS. I wouldn’t call what Musk did “year-end tax planning”. I would call it doing what he needed to do in order to boost his position. It would not have made sense to have his incentive stock options expire unexercised especially with the current trading price of TSLA.
I don’t like taking any action based solely on taxes, and year-end tax planning is no different. Make sure you have a fundamental (or perhaps good technical) reason why you want to sell a position before you actually do it. Don’t have regrets in the future about the fish that got away.