10/8/2024

At Mad River, our personal and family wealth is invested alongside yours. In fact, we are collectively the largest investor in our own strategies. A core principle of our investment philosophy is minimizing taxes to maximize long-term returns.

While market volatility can be unnerving, especially when markets decline, in our 30 years of managing client accounts, we’ve rarely seen emotional reactions around realizing capital gains.

In our view, paying unnecessary taxes, especially short-term capital gains, represents a permanent impairment of wealth. Once taxes are paid, that money is gone and can no longer compound.

Avoiding and Deferring Taxes: A Critical Strategy

The ideal scenario is to avoid taxes altogether by leveraging exclusions within the tax code. Here are some strategies to consider:

• Are you maximizing contributions to your 401(k) or IRA?

• Have you forgotten about a 401(k) from a previous job?

• Can you establish a Defined Benefit Plan, A Sep or Simple IRA, or Charitable giving account?

Another underutilized strategy is donating low-basis stock. By donating appreciated stock, you avoid the capital gains tax and receive a full-value deduction.

And while it’s not the most popular topic, when you pass, your heirs benefit from a step-up in cost basis, eliminating the capital gains tax they would otherwise owe.

The Power of Deferring Taxes

If tax avoidance isn’t possible, deferring taxes is the next best option. Our long-term strategy is to allow unrealized gains to continue compounding. When it’s time to sell, long-term capital gains are taxed at a lower rate than short-term gains.

By deferring taxes, you reduce their impact over time. The further out taxes are pushed, the less significant they become, especially in an inflationary environment where a dollar today is worth more than a dollar ten years from now. We aim to keep the “tax man” at bay, allowing your investments to keep growing.

Minimizing Taxes Through Tax-Loss Harvesting

Each year, we conduct a thorough review of all accounts, looking for opportunities to harvest losses for tax purposes. In any portfolio, there are bound to be some investments that have declined from their original purchase price. This is a great time to assess: Why is this investment down? Does the original thesis still hold?

If the answer is no, we may sell the investment and realize the loss, which can be used to offset other gains for the year. If the thesis still holds, we may sell the investment and repurchase it after 31 days, taking advantage of the “wash sale” rule to capture the loss while potentially reestablishing the position at a lower price.

We typically begin this process in October, aiming to get ahead of the year-end rush when others may be more focused on tax-loss selling.

Conclusion

In general, we believe that you should do everything you can to minimize your tax bill and push taxes as far into the future as possible—but always remember—don’t let the tax tail wag the economic dog!

If you’d like to discuss your 2024 tax situation, just call or email us. We’re here to help and appreciate your continued trust in us.

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