For those considering booking a tax loss this year, please keep in mind Longleaf’s short-term trading policy which prohibits trading in and out of the Funds within a six month window. This policy encourages long-term investing to benefit all shareholders.
While managing taxes is important to a number of our partners, successful investing offers significantly higher rewards over time. Tax loss selling of mutual funds has fewer benefits than often assumed because of two primary factors. First, the benefit of taking a loss this year versus paying a gain in the future is equal only to the difference between the tax offset this year and the net present value of the higher gains to be paid in the future assuming that you will buy back shares at the current price.
For example, if you bought shares at $30 and sell them at $23 to book the loss, the tax loss value is the 15% gains tax rate times the $7 loss, or $1.05/share. If you then repurchase the shares at $23 and sell them for $45 in the future, your capital gains will be $22 versus $15 had you not booked a loss previously. Assuming the same 15% tax rate, you would owe $3.30 versus $2.25 per share in taxes.
Selling is worth only the difference between the $1.05 “benefit” today and the net present value of the $1.05 cost in higher taxes paid in the future.