Podcast - December 5, 2023
In this podcast episode, the hosts discuss the concept of tax loss selling and whether it is a valuable strategy for investors. They argue that while tax considerations are important, they should not be the primary factor in making investment decisions. They emphasize the need to consider the overall quality and performance of investments, rather than solely focusing on tax benefits. The hosts also discuss the potential risks and limitations of tax loss selling, such as the superficial loss rules and the potential for missed investment opportunities. They suggest that investors should carefully weigh the costs and benefits of tax loss selling and consider their individual circumstances before making any decisions.
Transcript is automatically generated
Announcer (00:00):
You are about to get lucky with the Bare Naked Money podcast, the show that gives you the naked truth about personal finance with your hosts, Josh Schellek and Colin White portfolio managers with Verican Capital Management, Inc,
Josh Sheluk (00:15):
Colin and Josh here. Barenaked Money coming at you today. We’re talking about all the reasons you should sell every loser in your portfolio and add it somewhere else. Save those taxes, right Colin?
Colin White (00:27):
Yeah, see Josh, you’re wondering what we’re going to argue about. Very good job of setting up the argument. So we have entered a time of year just to sit here late November where you’re starting to hear phrases like tax loss selling. Tax harvesting, I love that. And all these other phrases are being thrown around and they all sound really compelling, don’t they judge?
Josh Sheluk (00:52):
Yeah. It’s funny because it’s the time of the year when we harvest not only our crops, but I guess our tax losses as well.
Colin White (00:59):
Is tax loss selling really a thing or is it just another one of these things that people throw out there that they think is important and it’s really not all that important? So let’s see if we can put it in its place where it belongs, where it’s useful but not destructive. So Josh, the lead investment manager for the firm, when you’re looking at making an investment decision, how far down on the total toll would you put the taxable oak tree at the given position When you’re trying to make a decision, have you ever looked at something and say, I’m just going to sell that because it’s a tax loss, it’s the only reason I’m going to sell it?
Josh Sheluk (01:43):
That’s a good question. I’m trying to think. Have ever thought that? I would say the answer is probably no to that. I think what you’re kind of asking is should tax be priority number one when building a portfolio? If I can just rephrase the question a little bit and I would say absolutely not. A tax decision should not be the number one decision when putting together a proper investment portfolio.
Colin White (02:12):
Well I think I absolutely agree with that, but it’s part of it is managing where does it fall in the realm of things you’d consider same? I mean one thing for me that the end of the year tax conversation, what it has done for me in the past is you view all of your positions, say this one’s underperformed, it’s in a loss position and is underperformed via the benchmark we’re holding it to and caused you go back and say, well alright, let’s take a look at it. If we were going to think about selling something, this might be a better time to do it rather than a month from now. So sometimes it draws your attention to something that you might not have been paying entirely close attention to and maybe you’re on the stance as to whether you want to get out of the position cause to do more of a deep dive to decide, alright, I’m really in love with this. I still think it’s a good question. So I think that’s a positive thing that the whole thinking about tax losses can sometimes highlight something and make you pay attention to things that maybe you are putting off or what’s not enough priority for you to look at before. So in my of mind, that’s positive thing there this moment.
Josh Sheluk (03:25):
Yeah, and in a perfect world though, to push back on that, you should be doing this all the time anyway. Anybody that’s looking at a portfolio should be looking at all the constituents in their portfolio to decide whether it makes sense to be there just on a pure outlook basis, ignoring tax or relevant attacks on an ongoing basis Anyway. So if you haven’t done that, is this a good time to revisit it? Absolutely. But try to do that no matter what.
Colin White (03:52):
Absolutely. And I’ll give you that. We have ended up on the horns of a dilemma where you’re 50 50 on something and you’re not entirely sure at that point quit a loss actually factor in the conversation. Maybe I guess one of the last things you look at to say, okay, yeah, maybe we’ll do it cost fact, but it’s really in the margins. To your point, yes, you should have upstate opinions and be comfortable with everything’s in the portfolio at times. But again, sometimes you get busy and this can draw your attention and things say you may want to consider, may want to consider, but the whole superficial loss rules kick, the ones that I see that are question why people turn themselves into pretzels trying to get around us is the rule state that you can’t sell something at a loss and reacquire it in the next 30 days.
(04:44):
Otherwise it’s considered a superficial loss and it’s going to be you’re not allowed to claim it and it’s you or connected person like your shelves or something like that. So that’s the rule set there to prevent people from getting out of something for short time and getting can do it next day. But there’s people get into, okay, well I’m going to sell this, I’m going to buy something very similar to it and unless you have to play the gray area, I keep the same exposure. One ETF came under ETF, have the same exposure play in the gray areas. Again, it can be dangerous, it can be caught, you can end up not having it. But at the end of the day, if you’re doing that, it’s really just a timing issue. If you claim a long stand say, and you acquire the investment 30 days, if you to lower cost base, she’s going to pay that tax later.
(05:37):
So again, it’s a timing thing. It’s not an actual, I pay less tax, it’s just when pay trigger the tax in particular investment and they start doing the math on, okay, so it was just a timing thing. What’s the tree value that? And it can get fairly slow. So I’ve watched people and you’ve watched people, the market can move big in a couple of days or we’ve seen this happen the last few weeks. There can be big moves that happen and if you’re trying to save a nickel that you’re going down these strategies portfolio a couple percent or the holding a couple percent eliminate any value could have gotten from the taxis and that’s a very real risk as well. Sure. But there are opportunities from a planning perspective, like it’s a client has traded a lot, lot of taxable income to giving year and driven themselves with a higher tax bracket.
(06:36):
Then you can go through your client’s deposits to maybe harvest in that year because of the tax situation applied in that year, much more about the tax plan. It can make sense then if it’s significant difference in tax rates, but those situations are surely rare. But in my experience, the planet, if you have a big income year or you’re going into lower income years, these things a little bit more. Lemme ask you a question on the pool structure that we use, well as I kind have from the answer, but how do you look at the taxable gains losses inside the pool? We did have a brief conversation fairly recently about that. How much attention do we pay to it and what have you seen other managers in the industry, how do they treat this issue?
Josh Sheluk (07:31):
So I will answer that question, but I wanted to sort of push back on what you’re talking about there. You said that you are not going to change your tax, but you actually could have a change in tax because what you followed to talk about was that tax rates change from year to year. So if you’re deferring your capital gain, let’s agree that your capital gain is going to be the same either way, whether you raise it, whether you realize the capital gain this year or next year or the year after. Let’s agree that you’re not changing the actual capital gain by making this decision, but you could be changing the tax that you pay on the capital gain and that’s what you were talking about when you are discussing the changes in income. If you’re at a high income for year one, you could be in a high tax bracket and if you can have a reasonable expectation of being in a lower tax bracket in the future, then you could actually pay lower tax because of it.
Colin White (08:30):
You just described it more eloquently than I did. I tried to say all that and if you didn’t understand me saying that, then I’m glad you jumped in and said it again because what I was trying to get across. So that’s on the individual basis.
Josh Sheluk (08:41):
I got you. But I understand you. I don’t know if everybody else does, right?
Colin White (08:45):
I do need an interpreter sometimes,
Josh Sheluk (08:48):
But to throw one more thing at you and our listeners is there’s still, even if you’re going to pay the same tax today and the same tax in five years, for example, just to make up two dates, there’s still a value of paying that tax five years from now rather than today. There’s a value of deferral because that’s more money in your pocket today that you can invest a compound for the next five years or however long it is until you realize that capital gain and that tax bill so agreed that you’re starting to split hairs and the margins are becoming smaller and smaller as we go along here, just the deferral, is that valuable? Maybe or maybe not. It’s less valuable than deferring to a lower tax year, but there’s still value in it.
Colin White (09:40):
Oh, absolutely. No, you’re right. And you can calculate the, and you have that conversation where you calculate the time value of paying taxes down versus five years and you can quantify what that is. But then you layer in the risk of the strategy, am I going to be out of the market for a period of time? Am I going to not be in an optimal investment strategy? Am I going to alternate with a solid investment strategy to be a little bit on the kill tip for 30 days while this is going on? So then you weigh that risk versus the marginal gain that you make it. And then what I always do is a calculation is how much of a difference does or has to be from an investment perspective to work that out. If you look at it and what’s the probability,
Josh Sheluk (10:22):
Yeah, yeah, it’s a cost benefit thing. You can try to quantify the benefit that you’re getting, but what are you giving up to get that benefit? And if you’re selling what you think is an otherwise good investment and otherwise sound investment that should have added value over time to potentially realize some modest tax savings over the next few years, then that’s where you got to really stop and question yourself as to whether or not it makes sense.
Colin White (10:50):
Well, that’s how I’m pushing back at the world because a lot of people say, Hey, you want to pay less tax? Absolutely. They don’t even let the whole phrase come out in their end and they never stop to do the math. They never stop to quantify because everybody wants to save tax. Tax is evil and it can be a false urgency and without diving into it a little bit, you may just be running in circles and not really getting anywhere. It may make you feel good, and maybe that’s the payoff. I feel good about this if you feel better. It’s better than going up for a drink maybe. But people in my opinion, are too quick to say, Hey, listen, we can save taxes is pretty, and you don’t ask a follow question and you don’t do the math and you don’t take a look at the risks of the strategy. That’s boring. That’s boring to do the math. It’s boring to look at the risks. It’s much more exciting to save tax. Yeah.
Josh Sheluk (11:42):
Yeah. Right, right. So back to your question on what do we do with the pooled fund. So we do that cost benefit analysis is essentially what we’re doing. We’re looking at the costs of exiting a position. The actual literal cost is not that high for us to exit a position. We’re talking about single dollars of the actual transaction costs, but it’s really the opportunity cost. If you exit a position that you like and you’re going into a position that you like slightly less just to get the tax benefit, again, you have to look at the pros and cons, the costs and benefits of making that move to decide whether or not it makes sense. And I would say more often than not, if we’re doing our job correctly, we already have the best possible investments in that portfolio. And again, more often than not, selling from the best possible investment to go into the second best or 10th best or whatever it is, is going to be, it would really have to move the needle a lot on the tax side for us. Try to think about it.
Colin White (12:51):
Well, this is boring, way more exciting to say let’s save tax. Well, I guess that’s my point. When you do the math on these things, it does change and understand the risks you’re taking. Part of is people assume that things are going to be level, the volatility we’ve seen, we’ve talked about it endlessly, the unknown volatility in the markets. You’re talking, well, one or two percentage point rules in the investment is going to wipe out the value of what’s going on. Then what are the chances you’re going to see a one or 2% rules in a relatively short period of time? It happens quite frequently, but it’s still, I guess from my standpoint, my advice to everybody is paying less tax is good, but it’s not as simple as I’ve got a loss position, I’m going to sell it. Because the other thing that we’ve got to realize is that loss is only applicable to other investment capital gains.
(13:50):
So if you trigger a loss, if you can’t reduce your T four income, it’s not going to reduce the taxes that you’re going to pay on your tax share If it’s inside your interest fee or TSA, it doesn’t count. So we’re only talking about investment center, just straight investment accounts. It’s still in place. This really matters and it’s limited. You can carry it back three years. You can carry, if it’s lost, you can carry it back three years. You can carry it forward as long as you want. So again, unless you have a surely dramatic difference in taxable income, one year to the next is going to be to your benefit. And that when you do the math on that, then yes, that can change the probability and how much of an investment compromise that you might be making. But again, it’s not a simple thing at all. You’re looking up into the left, that nearly means you’re thinking of an inside trash. Well,
Josh Sheluk (14:43):
I’m actually looking out the window here at the person that’s walking by live.
Colin White (14:48):
Oh, sorry. Well,
Josh Sheluk (14:49):
My wheels aren’t turning all the time Colin, you know that.
Colin White (14:52):
I know people reading skills. I’m still working on it.
Josh Sheluk (14:57):
I was just thinking that we often, and when I say we, investors often focus so much on this deferral, deferral, deferral that a lot of times they actually cause themselves a bigger problem because all of a sudden you deferred capital gains for 12 years and all of a sudden you want to sell a position and you’re like, well, I really don’t want to sell this position now because I have a massive capital gain all at one time. So this intent on deferral, if you trickle out your capital gains a little bit every year, that’s not really such a bad thing. Keeping your income level at a modest, reasonable tax bracket potentially, and all of a sudden you could end up with a pretty significant challenge. I think this is a good problem to have as we talk about all the time. It’s a good problem to have to have a large capital gain, but it’s a counterintuitive thought process to say, I’m not going to sell that position that I don’t want to hold anymore just because I don’t want to realize this capital gain. That’s the other side of the coin and I feel like we get in that situation way too often with people.
Colin White (16:09):
Well, it’s funny this Josh is arguing with the Josh about five minutes ago, so it’s really neat to watch it go full circle. You’re absolutely right because you know, defer to furniture, a very good point that you create that larger tax bracket you create that come a higher tax bracket and by the time you get into that stage, I will pause it. I will argue that you’re not in an optimal investment fully anymore. You have a legacy holding that worked out well for you and you just held onto it. And we see it all the time where we take a look at legacy of holding the stat over their lifetime. They made a lot of money, but they’ve dramatically underperformed in the most recent time period. You could have been way better off by being in something else and more balanced over the last short time period.
(16:53):
The human mind works like what paid 10 bucks for us, they worth 200 bucks. Obviously that was good. It was. It was for the first 10 years, held it down the last 10 years has been kind of shit. But again, it’s how the mind works and it’s boring. It is boring to do the work, to dig into it, to figure out this might not be even optimal. I want to make it. You really annoy people when you start attacking and saying, yeah, you should pay more tax. And I make the joke all the time. Listen, my job is to cause you the biggest possible tax bill. So if I’m really, really good at my job, you’re going to pay a lot of tax. I tell people, there’s two reasons you’re not going to like me. I don’t make you any money or you have to pay tax now you got to let me win. So you either be happy that I didn’t make you any money, you’re not paying your tax or be happy that you’re paying a lot of tax. Just I need some way to win that conversation.
Josh Sheluk (17:49):
Life isn’t fair, Colin, sometimes you’re just not going to be giving you Yeah,
Colin White (17:52):
I know, but I’ve got a microphone and I’m going to make my case. Yeah,
Josh Sheluk (17:58):
We can keep asking. We can keep leading with people to let us win one way or the other, but some people are just going to say no.
Colin White (18:04):
Yeah, I know. It’s just such is life. But no, I have we covered all the angles that you can think of coming at this from Josh?
Josh Sheluk (18:12):
Yeah, I think so. I think we want to, coming back to the question you asked early on, where does tax rank in the hierarchy? I think we are just trying to maybe move it down a couple notches in that hierarchy of people’s thinking to a more appropriate level in your thought process when it comes to investing,
Colin White (18:35):
And again, we’re pushing back as we tend to do against commonly held wisdom and some of the common messaging that’s out there, and especially right now because we’re recording as the end of November, so November, December is when a lot of the media is talking about tax loss selling and tax loss harvesting it and some of the major investment shops will be cleaning up their portfolio for the end of the year. They’ll be doing all kinds of things, so it’ll be very topical. So you’re now prepared when you read a headline about tax loss selling or tax harvesting, you’ll now be critically aware of the nuances of the article that you may read. Wow, I’m proud of us Josh.
Josh Sheluk (19:17):
Don’t let the tax tail wag the dog as the,
Colin White (19:19):
There you go,
Josh Sheluk (19:20):
Way over used saying goes.
Colin White (19:23):
Thanks for paying attention. Hope we didn’t fall asleep. You’re better prepared to go out into the world and listen to people talk about tax last, selling anything we haven’t covered, something you want to cover, reach out. I’m sure we can offer my opinion. We may have to record another whole podcast and apologize for something that we didn’t think talk about. So we’re open to your feedback.
Announcer (19:40):
If you’re breaking a sweat trying to figure out what your financial advisor’s talking about, you’re not getting the service you need. You probably hate trying to get an answer from them, but you also think moving your accounts will be a headache and it might be, but working with don’t rock the boat. Wealth or .ru isn’t exactly stress-free. Is it? Call us. We will demystify the world for you.
Announcer (20:01):
Verican Capital Management. Inc is a registered portfolio manager in all of Canada except Manitoba. So sorry in Manitoba. Nothing in this podcast should be considered as a solicitation or recommendation to buy or sell a particular security statements made by the portfolio. Managers are intended to illustrate their approach and are meant for information and entertainment purposes only. This should not be construed as legal, tax or camping advice. This podcast has been prepared for information purposes only. The tax information provided in this podcast is general in nature, and each client should consult with their own tax advisor, accountant, and lawyer before pursuing any strategy described herein. As each client’s individual circumstances are unique, we’ve endeavored to ensure the accuracy of the information provided at the time that it was written. However, should the information in this podcast be incorrect or incomplete or should the law or its interpretation change after the date of this document feedback provided may be incorrect or inappropriate. There should be no expectation that the information will be updated, supplemented, or revised, whether as a result of new information, changing circumstances, future events, or otherwise. We’re not responsible for errors contained in this podcast or to anyone who relies on the information contained in this podcast. Please consult your own legal and tax advisor.
