Author Topic: Opposite of tax-loss harvesting to improve tax efficiency of P2P?  (Read 8064 times)

brycemason

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If one was sitting on a lot of capital gains in stocks, he or she could conceivably sell enough to generate sufficient capital gains to offset P2P capital losses. Repurchase the shares immediately at a stepped-up basis. Wash sale rules don't apply on gains. What do you think? Is this a reasonable way of supporting a larger P2P portfolio?

AnilG

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #1 on: April 03, 2015, 03:08:44 PM »
Sure you can do this. http://www.wsj.com/articles/SB10000872396390444138104578030470128080176

A few items to consider:

1. You will need to pay transaction cost twice on the stock sale and repurchase.
2. You can offset capital losses against earned income up to $3,000. So you really should consider doing that if your P2P capital losses exceed $3,000.
3. You can carry over capital losses to the following years when you may have capital gains from other investments or earned income that steps you to higher tax bracket ($3,000 offset limit every year).

If one was sitting on a lot of capital gains in stocks, he or she could conceivably sell enough to generate sufficient capital gains to offset P2P capital losses. Repurchase the shares immediately at a stepped-up basis. Wash sale rules don't apply on gains. What do you think? Is this a reasonable way of supporting a larger P2P portfolio?
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Fred93

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #2 on: April 03, 2015, 03:37:39 PM »
If one was sitting on a lot of capital gains in stocks, he or she could conceivably sell enough to generate sufficient capital gains to offset P2P capital losses. Repurchase the shares immediately at a stepped-up basis.

I call this "tax gain harvesting".  I've done it.  I did it big time in 2012 when we knew that tax rates were going up in 2013.  I paid a large amount of capital gain tax sooner, but at a lower rate.  So, sure, you could do it if you knew you had substantial capital losses from P2P or anything else.

However, P2P capital losses from defaults aren't a one-time thing.  They happen year after year, as some loans default every year.  You can pull capital gains forward in time once, but this is not an ongoing strategy.

mchu168

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #3 on: April 03, 2015, 07:41:11 PM »
If one was sitting on a lot of capital gains in stocks, he or she could conceivably sell enough to generate sufficient capital gains to offset P2P capital losses. Repurchase the shares immediately at a stepped-up basis. Wash sale rules don't apply on gains. What do you think? Is this a reasonable way of supporting a larger P2P portfolio?

This makes absolutely no sense to me.  Taxes offset gains and losses - in a way the Government is sharing in some of your gains and absorbing some of your losses in a symmetrical way.  To artificially realize gains early just to offset current losses is a guaranteed money loser, imo.  If you want to sell some of your winners to take profit, reduce exposure in a security to re-balance your portfolio or to generate needed income - fine.  But otherwise why not save the losses for the future when you can use them to offset gains whenever they are realized.  Companies do this all the time, and smart people realize that NOLs have real value. Why waste them?

Anyways, I think the best way to invest in P2P is in a tax deferred account, so this kind of silly transaction that you are contemplating will never have to be utilized. By the way, your comment that "wash sales don't apply to gains" should tell you something.  The government would love to see more people do this because there's only upside for them and only downside for the taxpayer... think about it.
« Last Edit: April 03, 2015, 07:46:10 PM by mchu168 »

Fred

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #4 on: April 04, 2015, 02:45:19 AM »
Is this a reasonable way of supporting a larger P2P portfolio?

For a sufficiently large P2P portfolio, yes!

If, for example, your P2P charge-off capital loss is 10K, it makes sense to find a 7K capital gains from somewhere else so you don't have to carry over your losses to the next years.

It makes even more sense if your tax bracket is higher now than in the future.

brycemason

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #5 on: April 04, 2015, 03:00:47 AM »
Right, my sale of LC post IPO covered a good chunk of the amount above the $3k limit. Fred is right, though, that I'd have to make consistent gains in order to offset the structurally consistent losses that this asset generates. What a pita. Seriously debating making a holding company, the business of which is to make loans. Then I could write off all the losses as a business expense and just carry through the net.

Fred

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #6 on: April 04, 2015, 03:42:24 PM »
Seriously debating making a holding company, the business of which is to make loans. Then I could write off all the losses as a business expense and just carry through the net.

Please let me know how this goes. 

I have entertained a similar idea; however, since I need to disclose "side businesses" to my employer, I postponed it.

Boatguy

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #7 on: April 05, 2015, 01:56:49 PM »
Right, my sale of LC post IPO covered a good chunk of the amount above the $3k limit. Fred is right, though, that I'd have to make consistent gains in order to offset the structurally consistent losses that this asset generates. What a pita. Seriously debating making a holding company, the business of which is to make loans. Then I could write off all the losses as a business expense and just carry through the net.
If P2P is part of an larger investment portfolio that regularly generates cap gains then this is sort of a non-issue in that each year there are capital gains which are offset by the capital losses from P2P.  It's not so much a strategy as just a fact of life.  It would be a strategy if you could control when to take the P2P losses.  This scenario is the tail wagging the dog, but commissions are not a big factor these days so it's not a bad idea.

Are there any CPAs here who could speak to the tax legality of a company who's only business is buying LC loans?  I have a vague memory that companies who's sole business is investment fall under a different set of tax rules.  The tax treatment of write-offs is definitely the achilles heel of P2P, if the capital losses can be converted into ordinary losses just by forming a holding company, that would have a dramatic effect on the after tax IRR of P2P.

Fred93

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #8 on: April 05, 2015, 02:24:18 PM »
Are there any CPAs here who could speak to the tax legality of a company who's only business is buying LC loans?

There are quite a few of them now.  All of the "investment funds" that invest in LC loans are limited-liability companies (LLC).

Quote
if the capital losses can be converted into ordinary losses just by forming a holding company, that would have a dramatic effect on the after tax IRR of P2P.

This is one of the advantages many of them pitch.

neals384

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #9 on: April 09, 2015, 09:19:05 PM »
Let's walk this through.  Suppose we have, for 2014, $5,000 in P2P losses.  No other capital gains or losses.  And 100 shares of a stock worth $100/share; tax basis $80 per share.  We plan to sell this stock in 2015, when it may be worth, say $120/share.

Scenario 1:  Don't sell and rebuy the stock.  We have a 2014 write-off of $3,000 in losses against our income, plus a $2,000 capital loss carry over.  In 2015, we sell our stock and have a $4,000 gain, but we can use the $2,000 loss carry over to reduce that to $2,000. 

Scenario 2.  In late 2014, we sell and then re-buy the stock.  We have a 2,000 gain, and we still have $5,000 in P2P losses.  We still deduct the same $3,000 from our income, and our 2014 tax is the same as in scenario 1.  In 2015, we sell the stock and have a $2,000 gain, but no loss carry over, so we have to pay tax on the $2,000 gain.

In other words, there's no difference.

mchu168

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #10 on: April 09, 2015, 11:14:10 PM »
Let's walk this through.  Suppose we have, for 2014, $5,000 in P2P losses.  No other capital gains or losses.  And 100 shares of a stock worth $100/share; tax basis $80 per share.  We plan to sell this stock in 2015, when it may be worth, say $120/share.

Scenario 1:  Don't sell and rebuy the stock.  We have a 2014 write-off of $3,000 in losses against our income, plus a $2,000 capital loss carry over.  In 2015, we sell our stock and have a $4,000 gain, but we can use the $2,000 loss carry over to reduce that to $2,000. 

Scenario 2.  In late 2014, we sell and then re-buy the stock.  We have a 2,000 gain, and we still have $5,000 in P2P losses.  We still deduct the same $3,000 from our income, and our 2014 tax is the same as in scenario 1.  In 2015, we sell the stock and have a $2,000 gain, but no loss carry over, so we have to pay tax on the $2,000 gain.

In other words, there's no difference.

This is completely wrong... try again.

TAH

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #11 on: April 13, 2015, 05:41:34 PM »
Having just completed my taxes, I make this observation.

Short-term capital losses offset income in this order: 
  • short-term capital gains (not favorably taxed)
  • long-term capital gains (favorably taxed)
  • earned income to $3K (not favorably taxed)

So you'd want to harvest short-term capital gains.  Otherwise I think you'd be better off holding the long-term gains (vice harvesting them) and carrying forward the loss.

Bottom-line:  if you're not using the LC short-term losses to offset other short-term gains, you're offsetting favorably taxed income

Boatguy

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #12 on: April 15, 2015, 06:42:33 PM »
Are there any CPAs here who could speak to the tax legality of a company who's only business is buying LC loans?

There are quite a few of them now.  All of the "investment funds" that invest in LC loans are limited-liability companies (LLC).

Quote
if the capital losses can be converted into ordinary losses just by forming a holding company, that would have a dramatic effect on the after tax IRR of P2P.

This is one of the advantages many of them pitch.
An LLC is taxed like a partnership or S-corp, income/gains flow through directly.  I ran an investment partnership for many years and since most of the income was LT Cap Gain this was an advantage, nobody wanted regular income.  I don't think an LLC can convert cap losses into regular losses, they would flow right through to the members of the LLC.

ktrdsl23

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #13 on: April 27, 2015, 10:14:57 AM »
Here is what I don't quite understand regarding the tax issues and I'll admit I'm new to P2P investing.  Most of the information I've read (including this site and these boards) recommend not investing more than 10% of your portfolio in P2P.  I also see that a normal default level on these loans is between 5-8%.  So assuming you follow some of the generally accepted practices you are going to be investing 80-90% of your money outside of P2P and likely in something like the stock and bond market.  Even if you are very tax efficient in those investments with the S&P dividend yield around 1.8% you will likely recognize at least 1% in dividends and capital gains to use to offset your P2P losses.

Hypothetical $1mm total portfolio
$100k - P2P -> 8% default rate so $8k tax losses
$900k - Stocks, bonds and cash -> 1% yield so $9k tax gains
Net - $1k net cap gains

So realistically unless you are investing the majority of your portfolio in P2P which is certainly risky for such a new vehicle you will likely generate enough capital gains to offset your P2P losses.  It also wouldn't make sense to invest the majority of your portfolio in stocks and bonds in a tax deferred account but your P2P in a taxable account so let's ignore that.  For me I'm already taking advantage of most tax favorable opportunities available and am trying to understand the tax impact of my P2P investments within the context of my overall portfolio.

Am I missing something with my above analysis?  Thanks.

brloans

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Re: Opposite of tax-loss harvesting to improve tax efficiency of P2P?
« Reply #14 on: December 17, 2015, 09:56:57 PM »

An LLC is taxed like a partnership or S-corp, income/gains flow through directly.  I ran an investment partnership for many years and since most of the income was LT Cap Gain this was an advantage, nobody wanted regular income.  I don't think an LLC can convert cap losses into regular losses, they would flow right through to the members of the LLC.

Just thinking here...wouldn't only the net income (after losses) number be carried to the partners/shareholders tax return? Or for a investment company the flow through is different? Because on normal business just the net income numbers goes to the partners tax return and pay tax on that.

I have been thinking about forming an LLC, did anybody make a progress on this thought?