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This year-end stock-selling strategy offsets capital gains taxes and sidesteps the wash-sale rule

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Tax-loss selling is not as easy as it looks. I’m referring to the practice of selling in December those stocks you hold at a loss, in order to offset the capital gains you’ve already realized and on which you will otherwise have to pay tax. While this seems straightforward, it quickly becomes complicated.

That’s because of the IRS’s so-called wash-sale rule, which prevents you from using the tax loss of any stock you’ve sold if you buy it back within 30 days. That’s something you would want to avoid, since previously beaten-down stocks have some of their best weeks of the year once tax-loss selling abates. Much or all of that rebound takes place when the wash-sale rule prevents you from holding these stocks.

This is illustrated in the chart below, which reflects monthly data back to 1926. Notice that the trailing year’s worst-performing stocks continue to lose money in December, but stage a strong rebound in January. To put their strong January returns in context, consider that on an annualized basis it’s equivalent to a 55% gain.

The key to navigating through these obstacles is to find another security that is closely correlated with the stock whose tax loss you want to harvest. You would want to take the proceeds of the sold security and invest it in the correlated one for the 30 days of the wash-sale rule, and then reverse the transactions. Insofar as your replacement stock performs as well as your sold stock, you will forfeit no investment gain while also producing a nice tax benefit.

A good place to start your search for a correlated security is the “Correlation Tracker” available at the Select Sector SPDR website, which shows you the correlation coefficient between the stock you’re thinking of selling and each of the 10 “Select Sector” SPDR ETFs. The reason it makes sense to start your search with these ETFs is that the bulk of a particular stock’s return can be explained by the performance of its industry.

To understand the statistics this website reports, keep in mind that the correlation coefficient will be 1.0 if there has been a perfect correlation between the stock in question and a SPDR ETF. A 0.0 coefficient means there has been no correlation.

For purposes of the strategy to beat the wash-sale rule, choose a SPDR ETF with a correlation coefficient of above 0.7. From a statistical point of view, that means you’re finding a SPDR ETF whose gyrations explain or predict at least half of your security’s movements.

An alternate approach would be to find an individual stock in the same industry that you also find attractive. For each stock in the table below, I turn to the investment newsletter database my firm maintains to find another stock in the same industry (same two-digit SIC code) that is most highly recommended by the top performing newsletters I monitor.

The table contains the 10 stocks in the S&P 500 with the worst year-to-date returns. It also shows the SPDR ETF that each of them is most correlated with over the last three years. 

Stock

Year-to-date return (through 12/2)

Most highly-correlated Select Sector SPDR (with correlation coefficient in parentheses)

Newsletters’ most-highly recommended stock in same industry (per 2-digit SIC)

Norwegian Cruise Line Holdings
NCLH,
+8.63%

 

-59.9%

XLF
XLF,
+0.03%

 (0.82)

Royal Carribean Group
RCL,
+4.66%

 ]

Occidental Petroleum
OXY,
+3.14%

 

-58.9%

XLE
XLE,
+1.04%

 (0.83)

Exxon Mobil
XOM,
+0.67%

 , EOG Resources
EOG,
+0.73%

 

Carnival Corp.
CCL,
+8.12%

 

-57.9%

XLF  (0.78)

Royal Carribean Group  

TechnipFMC PLC
FTI,
+3.53%

 

-56.9%

XLE  (0.85)

IBM
IBM,
-0.81%

 

Marathon Oil
MRO,
+2.14%

 

-54.9%

XLE  (0.87)

Exxon Mobil, EOG Resources  

Diamondback Energy
FANG,
+3.43%

 

-54.8%

XLE (0.85)

Exxon Mobil, EOG Resources

American Airlines Group
AAL,
+8.27%

 

-48.0%

XLF (0.77)

Fedex
FDX,
+0.33%

 

Apache Corp.
APA,
+4.80%

 

-48.0%

XLE (0.83)

Exxon Mobil, EOG Resources

National Oilwell Varco
NOV,
+2.36%

 

-47.3%

XLE (0.78)

IBM

United Airlines Holdings
UAL,
+6.80%

 

-47.0%

XLF (0.82)

Fedex

Note carefully that the wash-sale rule only applies to stocks whose losses you are hoping to harvest for tax purposes. If you own a stock with a large gain and want to pay tax on it in this taxable year, you can sell it and then immediately repurchase it.

I mention this because of the concern many of you have that tax rates will be higher in coming years, which might make it preferable to pay taxes on your accrued gains at today’s lower rates. Yet even if rates are higher in coming years, it still might make sense to hold rather than sell now and pay the tax. That’s because until you realize any gain you are benefitting from the compounding effect of the amount you’d otherwise have to pay in taxes.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More:Why the 2020s could favor market-timers over buy-and-hold U.S. stock investors

Plus: Life inside a stock market bubble is great until someone takes out a pin



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Despite falling unemployment, America’s poverty rate just reached the highest level since the pandemic began

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As of last month, the U.S. poverty rate has been on an upward trajectory.

Between February and March, the rate of poverty in the U.S. increased by 0.5 percentage points to 11.7%, resulting in the highest level since the onset of the coronavirus pandemic, though the change wasn’t statistically significant. That’s second only to 11.6% recorded in November 2020. These estimates were taken before the rollout of the Biden administration’s American Rescue Plan.

Since spring of 2020, real-time poverty data in the U.S. has been tracked every month by economists Bruce Meyer, from the University of Chicago Harris School of Public Policy, and James Sullivan of the University of Notre Dame’s Department of Economics and the Wilson Sheehan Lab for Economic Opportunities.

More than 100 million claims for unemployment insurance have been filed over the last year, the economists wrote with co-author Jeehoon Han of Zhejiang University in China, describing the government’s three stimulus packages.

“While new UI claims fell sharply from April through July of last year, weekly claims have remained high since then at more than 1 million claims each week, about 5 times the pre-pandemic rate,” they added.


‘Many government benefits expired, unemployment insurance benefits are typically only about half of pre-job loss earnings, and nearly 5 million people have left the labor force since the start of the pandemic and, therefore, are not counted as unemployed.’

Those who experienced the sharpest rise in poverty included children, white people, women, those with low education, and those in nearly half of U.S. states that have more restrictive unemployment-insurance payment policies. Last month marked the first time that poverty has been so acute for children, non-minorities and women, the report added.

Under the American Rescue Plan, individuals making less than $75,000 a year in adjusted gross income received $1,400. The payments decreased for individuals earning $75,000 and up — and phased out completely for those making $80,000 or more and couples making $160,000 or more in adjusted gross income. It was the third such relief package over the last year.

Unemployment fell to 6% in March 2021 from a seasonally adjusted 14.8% in April 2020, as poverty rose. Initial jobless claims filed traditionally through the states fell to a seasonally adjusted 576,000 from 769,000 in the prior week, the government said last week, marking the largest decline since August. Yet 16.9 million people are still reportedly collecting benefits.

“This disconnect between poverty and unemployment is not surprising given that many government benefits expired, unemployment insurance benefits are typically only about half of pre-job loss earnings, and nearly 5 million people have left the labor force since the start of the pandemic and, therefore, are not counted as unemployed,” the economists added.

In the last week of March, 20 million Americans getting by primarily due to the generosity of friends and family were more likely to be suffering from food insecurity, according to a separate analysis by Claire Zippel, a research analyst at the Center on Budget and Policy Priorities, a think tank focused on the impact of budget and tax issues on inequality and poverty.

Also see: George Floyds and Christian Coopers are all around you — they are your neighbor, teacher, co-worker and friend



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These money and investing tips can help you stay upright against the market’s headwinds

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, can give you greater knowledge about the financial markets’ current condition as you monitor your portfolio and plan ahead. Plus, check out several short videos about whether to include bitcoin and other cryptocurrency in your portfolio and how to go about it if you do.

Sign up here  to get MarketWatch’s best mutual funds and ETF stories emailed to you weekly!

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Opinion: I took advantage of the 2020 RMD rule but now my 1099-R looks wrong — what should I do?

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Q: I took advantage of the 2020 RMD rule and returned what I had taken from my IRA thinking there would be no taxes. I just got a 1099-R showing the full RMD. That can’t be right. How do I correct it?

—Pauline

A.: Pauline,

If the 1099-R is incorrect, you will need to contact the firm that issued the statement to get it corrected. However, the 1099-R is probably correct.

Read: Are there new RMD rules this year?

Under the law, the firm issuing the 1099-R has no responsibility for reporting how much of a distribution is taxable. That responsibility rests on your shoulders as a taxpayer. The issuing firm need only report what was paid out of the IRA on 1099-R.

Not sure where to retire? Let us help you find the right spot

That does not mean you will pay any tax. Any funds returned to the IRA by Aug. 31, 2020 is considered a rollover and is not taxable. Normally, Required Minimum Distributions (RMD) are not eligible for rollover, but IRS guidance after enactment of the CARES Act that waived RMD for 2020 changed that. The guidance stated the normal 60-day time limit for rollovers would not apply and instead instituted a fixed deadline of Aug. 31, 2020 to return such distributions and avoid taxation.

Read: It’s not too late to save on your 2020 tax bill — here’s how

I get similar questions about 1099-Rs every year. The reporting of the gross distribution looks like an error but in most cases, it is correct and the person receiving it simply hasn’t learned how it is accounted for yet.

Here’s how the accounting typically works.

As with any gross amount reported on Form 1099-R, you declare the amount that is not taxable when you file your 2020 tax return. What I hear most tax preparers would do in your situation is put the gross distribution amount from 1099-R on line 4a as per the normal procedure. Then, they would place a zero in 4b of your Form 1040, and put a note on the return near those lines that it was “returned to the IRA under the CARES Act,” “CARES Act rollover,” “CARES Act,” or simply “Rollover.”

Read: These are the best new ideas in retirement

If you did not return all of distribution by the deadline, the portion that was not returned would be taxable. You would put that number on line 4b.

Read: 5 things to do if you inherit a Roth IRA

As I mentioned a moment ago, the discrepancy between the gross distribution reported and what should actually be taxable comes up in other situations. Three of the most common are other rollovers, Qualified Charitable Distributions (QCD), and distributions from accounts that had received after-tax contributions.

In all those cases, the reporting process looks like what I described above. You put the gross distribution on line 4a and the taxable portion on Line 4b. Then note why the numbers are different with “rollover,” “QCD,” or “See Form 8606” on the 1040. Form 8606 is the form used to determine the taxable amount of an IRA distribution when nondeductible contributions have been made to any of one’s IRA accounts.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.

Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.



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