In this early experimentation and refinement stage, I’m trading in an IRA. My taxable account is reserved for ETFs that I rarely touch. There are no short-term or long-term gain taxes in an ERA and there are n deductions for losses. In a taxable account, however, to sell something at a loss and have that count against my taxes I need to have held the security for a month without buying it (in any account, taxable or otherwise) and after I sell it, I can’t buy it for another month.
(This is supplemental to the Investing as a Writer page.)
The disqualification of a loss from my taxes is the issue here. A wash sale is the solution. A wash sale is the law’s way of allowing me to deduct that loss later, but there’s a catch if I’m trading in different types of accounts. If I have a disqualified loss and purchase the stock again in my taxable account, a wash sale is created. If instead, I purchase that stock again in an IRA, that disqualified loss is gone forever.
A wash sale adjusts my cost basis, reducing the taxes I’ll owe on a gain or recapturing a qualifying loss.
When I start trading the method in a taxable account, which will be necessary only if I wish to withdraw money before my retirement, I’ll need to have rules in place.
Trade certain stocks in the taxable account and trade them only there.
When I’m trading on the app, it’s easy to assume I’m buying into one account while the app has me in another. Purchases into a taxable account will have to be made carefully.
Create a month-long hold in a taxable account for disqualified losses I want to claim.
The method doesn’t hold stocks long enough to qualify for a tax deduction. If I watch my closed positions and track those disqualified losses, however, I can determine when a loss needs to be reclaimed. The stock will be left alone for a month, purchased, and either sold for a gain or held for a month and sold at a qualified loss. During that time, the stock is disqualified from purchase, but after the qualified sale it will be eligible for trade again.
Other Thoughts:
The Method’s short holds result in short-term taxes. Short-term losses can be deducted from short-term gains. For profits to be a long-term gain, I’d have to hold the position for over a year.
The Method has higher taxes than the invest-and-forget-it model and needs higher profits to justify those taxes. The invest-and-forget-it model is a worthy plan, by the way. In the last month, the S&P 500 Index has made 4.76% and my taxable account of ETFs has made 4.66%. If the Method can’t beat the S&P, I’m better off investing long-term in ETFs.
For guidance in mid-term investments, by which I mean they feel long-term but may not last a year, I subscribe to Leaderboard by Investor’s Business Daily. Their method requires a bull market, and I began subscribing during the rough patch that began in October. It’s too soon judge results.
—Thaddeus Thomas
Disclaimer: The information provided in this material is for educational and informational purposes only and should not be construed as financial advice. I am not a licensed financial advisor, and nothing contained herein constitutes a recommendation to buy, sell, or hold any security or investment. Investing in stocks involves risk, including the potential loss of principal. Before making any investment decisions, you should conduct your own research and consult with a qualified financial professional who can assess your individual circumstances, financial situation, and investment objectives.