Please excuse the shortened format tonight. Please also forgive me the lack of funny pictures.
You see the Dividend clan decided to go for a last-minute memorial day vacation up to Seattle.
A Priceline Westin room near our favorite Taiwanese Shanghainese soup dumpling place for 150 bucks, a stroll through the Chihuly Gardens with their incredible organic appearing blown glass art, and we’re all doing pretty well.
But the show must go on.
So I figured, why not hit you with a few short but sweet reflections on travel hacking?
The first item is that I’ve been getting a lot of comments on the tax consequences of my previously mentioned Loyal3 passive manufactured spending strategy.
To understand the issues raised, we must first go over the arcane tax law that surrounds taking losses and gains on investments.
The first concept understand is “tax loss harvesting.”
The idea here is that if you buy a stock, mutual fund or ETF and you sell it for a loss, then as long as you don’t buy that stock or an equivalent stock again within 31 days you can claim the loss (and use it to offset up to $3000 of ordinary income, or an unlimited amount of capital gains income.)
If you do repurchase the same stock or an identical stock within 31 days, this is classified as a “Wash sale,” and you lose your right to claim the loss.
So if you lose say 500 bucks when your emerging markets ETF goes down , you can use this $500 loss to offset any future or current earned income (up to $3000 a year,) or (an unlimited amount of) capital gains. (This is why it was widely speculated that Mitt Romney’s unreleased tax returns showed that he paid no taxes in the years following the financial collapse of 2008.)
So the issue in relation to manufactured spending through loyal3, is that if you buy your portfolio on the same day every month, you will never have waited the required 31 days to repurchase the same security, and you will never be able to write off your losses.
This is trouble because taxes will take away up to 50% of all your gains, but you would never be able to decrease your tax burden by declaring your losses.
I think there are two ways around this.
The first, and easier approach, is to cancel your next months buy order for any securities that have lost a significant amount at the time of your previous months sale. So if you lose $0.25 or $0.50 on Apple or Berkshire Hathaway, no big deal. But if you lose 20 bucks, on Aeropostale, you cancel your next months order of the stock so that you can take the loss.
The downside to this approach is that you will not be able to purchase all of your Stocks every month which decreases your potential manufactured spending total. But the upside is that it’s pretty easy.
The second approach, which both leaves no losses on the table, and takes quite a bit more time, is to just schedule your next monthly purchase 31 days after your prior months sale. The downside here is that this will require quite a bit of clicking on loyal3’s not so user-friendly website, and you will not be able to execute a full 12 sales/year.
The upside is that every cent of losses will be used to offset gains.
I will probably go with the first approach, since laziness is a big motivator for me.
The second issue worth mentioning is that the amount of work that I will have to do next year around tax time. Assuming I buy and sell 55 securities each month for both me and my wife, this will add up to 1320 total stock sales/year to be filed on my tax form next year.
Which may well suck. My accountant may fire me.
You’d better believe that if it does suck or even if it doesn’t I will give you a full update right here.
