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tives. He noted the GameStop stock bubble as an example that may look good in the near term, but the usual outcome for a small investor in events like this is disaster. Napatree’s philoso- phy, Landon added, is the exact oppo- site of chasing bubbles.
“We want to buy compelling long- term businesses that are selling at
a discount right now because we’ve researched the likelihood they will be going up, not down,” he explained, adding that, when Napatree recom- mends a company to a client, the firm also own it.
“When we believe in an invest- ment, it’s where we are putting our own money as well,” he said. “We think it’s important to show that we invest in the same companies as our clients.”
Another part of Napatree’s business involves helping small and medium- sized companies manage their employ-
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from 10% to 37%. These two buckets cannot be mixed, so you cannot reduce your short-term capital gains by long- term capital losses or vice versa.
Sure, it’s nice to mitigate your tax liability, but wouldn’t you lose more money selling your investments for a loss than you save in taxes? Why not just wait for those prices to bounce back and sell for a gain, assuming you expect the investment’s price to even- tually recover? The price may recover down the line, but the tax bill associat- ed with any capital gains generated this year cannot be avoided unless a loss is generated in the same year.
The solution is purchasing a similar asset shortly after selling for a loss. This way, you ‘harvest’ the capital loss for tax purposes while making little actual change to your investment portfolio. The IRS instructs that you must wait at least 30 days before purchasing anoth- er asset that is “substantially identical” to the asset sold for a loss, but there are enough similar assets available to allow immediate reinvestment in most situations.
An Example to Clarify
Here is a hypothetical example using common investments: the S&P 500 large-company index and Russell 2000 small-company index tracking ETFs (the prices are fictionalized for ease of understanding, but the ETFs are real and can be purchased through most brokerages).
In this example, in your broker- age account, you purchased 10 shares of iShares Core S&P 500 ETF (IVV) on Jan. 1, 2021 for $100 per share, for a $1,000 total investment. On the same date, you also purchased 10 shares of the iShares Russell 2000 ETF (IWM) for $200 per share, or a $2,000 invest- ment. By Nov. 1, 2021 the price of IVV
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ee 401(k) programs. Landon said the firm works with a couple dozen busi- nesses to make sure programs are designed well and priced fairly, and that employees feel confident about participating in the plan.
“About 80% to 90% of the people we talk to have not been trained in invest- ing; they would rather be gardening or hiking,” he added. “So, if we can help put them at ease and feel good about the path they are on, it’s enormously rewarding.”
Bottom Line
Landon said he and his colleagues love to meet with people to dissect their financial situations, and if it leads to someone being a client, that’s even better.
“We’re excited to be here in Western Mass. to expand the Napatree foot- print,” he told BusinessWest. “We look forward to helping a lot of people and doing good things in the community.” u
(the large-company index) has doubled to $200 per share, and you decide to sell five of your 10 shares, generating $1,000 in short-term capital gains.
However, you do not want to pay income taxes on an additional $1,000 on top of your regular wages. You notice that the small company index IWM’s price has dropped to $100 per share, so you lost $1,000 on that invest- ment. You do not want to sell at a loss, but then you realize that, if you sell all 10 shares of IWM, you can generate a short-term capital loss of $1,000 which will completely mitigate the short-term gains from your sale of five shares of IVV when you file your income tax return.
You sell all 10 shares of IMW, but you still want to invest in small-com- pany stocks. You immediately purchase $1,000 worth of shares in iShares MSCI small-cap index fund SMLF with the cash received from the sale of IWM. This fund gives you similar exposure
to the Russell 2000 small-company index fund (IWM) you just sold with- out tracking the same index, mean-
ing the IRS will not consider the two funds “substantially identical,” so you can purchase it before the 30 days are up. At this point, you have effectively received $1,000 in capital gains with- out generating any taxable gains, and you have maintained your portfolio allocations.
Note that, if you had purchased IVV more than a year before you sold it on Nov. 1, 2021, the gain would be clas- sified as long-term, so the short-term loss generated on the sale of IMW would not offset this gain. Speak to your tax advisor regarding capital-loss carry-forwards, as capital losses not used to offset gains in one year can be applied to future tax years. u
Gabe Jacobson is an associate at the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.; (413) 536-8510.
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