An article revealed Feb. 9 by ProPublica put a highlight on the obvious abuse of wash sale guidelines by quite a lot of extremely outstanding buyers, together with Steve Ballmer, the previous Microsoft CEO.

In line with ProPublica’s reporting, Ballmer managed to reap simply shy of $580 million in losses between 2014 and 2018. Whereas eye-popping, the quantity of the losses harvested just isn’t the main target of ProPublica’s evaluation.

Relatively, the story raises large questions concerning the methods wherein a minimum of among the losses had been apparently generated, and it additionally posits that the follow of tax-loss harvesting is ripe for abuse by ultra-wealthy buyers who’ve entry to essentially the most subtle funding advisors and consultants.

For the reason that article’s publication, ThinkAdvisor has been soliciting feedback from a spread of monetary advisors and different monetary business professionals who satisfaction themselves on the supply of extremely tax-efficient funding approaches to their shoppers. In line with the professionals, the transactions reported on by ProPublica do certainly appear to violate the spirit, if not the letter, of the Inner Income Service’s anti-wash sale guidelines.

Nevertheless, the advisors took problem with the broader characterization of tax-loss harvesting as a technique that’s inherently problematic from a tax-fairness perspective, and so they equally took umbrage with the suggestion that loss harvesting is one thing that’s solely out there to the wealthiest or most subtle buyers. In as we speak’s market, many middle-class and mass prosperous buyers can and do reap the benefits of loss harvesting as a way to reduce taxes and maximize wealth era.

In the end, in response to the consultants, it is vital for buyers and their skilled advisors to think about the each the regulatory and reputational danger that may come together with “overly aggressive” makes an attempt to reap losses after which shortly reinvest in comparable methods. As Ballmer’s case reveals, simply because a given transaction may arguably be known as authorized, that doesn’t imply it received’t generate scrutiny or legal responsibility if the IRS comes knocking.

What ProPublica’s Reporting Discovered

As ProPublica reviews, in a single transaction in July 2015, Ballmer allegedly dumped lots of of shares, dropping a minimum of $28 million, together with by promoting shares of the Australian mining firm BHP and the worldwide oil big Shell. The issue is that Ballmer additionally allegedly purchased 1000’s of shares in BHP and Shell on the identical day.

On the face of it, this transfer would appear to plainly violate the anti-wash sale guidelines put in place by the IRS in 1921. Put merely, the wash sale guidelines forbid the promoting of a safety at a loss for the tax advantages if the vendor then shortly buys again the identical or a considerably comparable safety to learn from its anticipated future efficiency.

In Ballmer’s case, the particular share sorts bought and bought had been technically totally different, in response to ProPublica, although they had been issued by the identical firms. This distinction apparently gave Ballmer and his Goldman Sachs advisors cause to imagine they weren’t violating the wash sale guidelines.

In line with ProPublica, by utilizing comparable methods, Ballmer was ultimately in a position to generate tax losses totaling $579 million with out meaningfully altering his funding portfolio. The estimated tax financial savings from these losses quantity to a minimum of $138 million.

The article suggests numerous different outstanding buyers working with Goldman Sachs and different companies have engaged in comparable actions, collectively producing billions in harvested losses over a interval of 5 years.

Notably, with the emergence of the media scrutiny, Ballmer and others have dedicated to amend their earlier tax filings and to pay any related taxes, curiosity or penalties promptly. Goldman Sachs has additionally reportedly halted sure buying and selling actions in response to the reporting.

What Trade Execs Must Say

Whereas the primary focus of the ProPublica article is the obvious abuse by Ballmer of technical loopholes that exist within the present wash sale rule framework, the article additionally raises questions concerning the equity of tax-loss harvesting itself, and whether or not such methods exist purely for the advantage of the wealthiest and most financially savvy People.

Requested for his ideas on the problem, Andy Watts, vice chairman of funding options at Avantax, a agency specializing in tax-aware wealth administration, had quite a bit to share, beginning with the truth that tax-loss harvesting can profit any long-term investor, particularly these targeted on getting ready for retirement.

“It will be important for anybody who’s planning, accumulating and withdrawing property for retirement to have some tax registration diversification,” Watts says. “If you end up doing retirement planning proper, you’re going to have taxable {dollars}. In that sense, there’s no debate. The typical American completely must be utilizing tax-loss harvesting.”