My Experiment with Tax Loss Harvesting Microsoft - Part 1
Sometime ago I bought a share of Microsoft. That share cost me a little more than $300.
Since then, that share has dropped in value about ninety bucks. So I wanted to run a little experiment to see if I could harvest those losses on my taxes and then rebuy before the end of the year.
What is tax loss harvesting?
Simply put, tax loss harvesting is selling an investment at a lost and then deducting that loss from your taxes.
Of course, there’s limitations to how much you can deduct, and since it a tax deduction - that is, it lowers your taxable income - it’s not a dollar-to-dollar benefit on your taxes.
Finally, if you rebuy that investment too soon, you may not be able to deduct the loss on your taxes due to the wash sale rule.
What is the wash sale rule?
The wash sale rule states that if you sell an investment at a loss and then rebuy that investment within 30 days before or after, you can’t deduct the losses on your taxes.
So if you want to claim the losses, you have to wait 30 days. You also have to be careful that you didn’t buy that investment 30 days before you sell at a loss.
The most common way you might’ve bought the investment 30 days before you sold is through some sort of dividend reinvestment program. So make sure you didn’t have any dividends reinvested in the past month.
My Microsoft Experiment
I started buying Microsoft stock via Robinhood about a year ago, but didn’t get a full share until March of this year.
Over time and with dividends, I ended up with 1.008562 shares at an average price of $307.79.
That means I had $310.43 invested. But the price per share has dropped significantly since then.
On November 4th, the price had dropped to $217.22. Meaning my 1.008562 shares were now worth only $219.08.
So I sold - meaning I lost $91.35. That’s the difference between how much I paid for the shares ($310.43) and how much I sold the share for ($219.08).
Since a good chunk I’ve invested for less than a year, this will reduce my taxes for my ordinary income marginal tax rate - which is 24%. For the point of this experiment, we’ll also look at my long-term capital gain marginal tax rate, which is 15%.
At my ordinary income marginal tax rate, I saved $21.92 on my taxes (the $91.35 loss multiplied by my ordinary income marginal tax rate of 24%). This means so long as the price of the Microsoft does not increase by $21.92 or more by the time I rebuy it, I will end up ahead. In other words, the price cannot exceed $241 - or a 10% increase.
At my long-term capital gain marginal tax rate, I saved $13.70 on my taxes (the $91.35 loss multiplied by my ordinary income marginal tax rate of 15%). This means so long as the price of the Microsoft does not increase by $13.70 or more by the time I rebuy it, I will end up ahead. In other words, the price cannot exceed $232.78 - or a 6.25% increase.
To avoid a wash sale, the soonest I can rebuy the stock is on December 5th - which is a Monday.
I also had to make sure that the last dividend (really, dividend reinvestment) wasn’t within the last thirty days. It turns out it was on September 8th - so 57 days before I sold on November 4th, which is more than thirty.
What are my risks?
My risk is that the price of Microsoft will shoot up within the next thirty days.
What can go right?
If the price of Microsoft continues to drop, I could potentially rebuy at a lower price - either ending up with more shares than I did before, or with the same amount of shares and some extra cash.
So, I’ll see everyone in a month to see if I did something smart or stupid.