As a child I was told that eating too much candy would make my stomach hurt and ruin my teeth. But what child can resist those sugary snacks!
Investors are not too different. We love it when our investment portfolios go up! It is wonderful seeing the pool of money we smartly invested in grow. The “stomachache” can come from when we want to use some of those profits for other things. Typically, that is going to result in taxes.
With the S&P 500 up double-digits over the past 3 years and looking to make it 4 in a row, many investors are faced with this dilemma. They may want to reallocate some of their profits to other investments, a large purchase, or countless other items; but they know this will only result in a larger tax bill next year.
So, what is an investor to do?
While this should not be conveyed as tax advice and you should also seek the advice of a professional tax advisor, there are a few steps to take that could help lessen the pain of that stomachache after these sweet last few years.
First, look to see if there are opportunities in other names in your portfolio that are down. Selling those at a loss will help to offset the capital gains you will face from selling the investments that have gone up since you bought them. You’re always welcome to get back into those names that you sold, but I would encourage you to be mindful of the date you sold, waiting 31 days to buy back in, or you will create a wash-sale and lose the loss you thought you had taken.
Next, if you are philanthropic, there may be ways of having your cake and eating it too. For those that give money to charities and other non-profit organizations, you can do that via cash, check, etc. Or you can set up what is called a Donor Advised Fund (DAF for short). Many of these are set up, so you can donate portions of stock or other investments to set up and fund them. Depending on the asset and how long you have owned it, you could get the initial tax break up to the full value of what you move into the DAF. Then, that DAF becomes a charity checkbook account, of sorts. You donate to your charities from- your DAF like you would out of your own personal checkbook, but more tax-efficiently.
There are seemingly countless ways to walk the balance of minimizing your capital gains taxes, while still feeling free to spend and reallocate as you wish. From custom or direct indexing, exchange funds, and professionally managed tax-loss strategies, there is constant innovation in this space to help investors feel a bit more in control of their tax liability.
If you have questions about some of these strategies or want to speak further on your unique situation, I would welcome the opportunity to chat, so please reach out.
Please note that any investment involves risk including loss of principal. This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services. Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice. Fees and expenses may reduce returns.
Securities offered through Arete Wealth Management, LLC, members FINRA and SIPC. Investment advisory services offered through Arete Wealth Advisors, LLC an SEC registered investment advisory firm.
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