Just Read Hannah Vol. 4: The tax video, explained

Oh hello there! 👋 Welcome back to Just Read Hannah, my newsletter that just hit its 500th SUBSCRIBER! (Why this excites me more than tens of thousands on IG and TikTok, I’m not entirely sure - maybe it feels more intimate?)

So. Secrets from the Wall Street Boys Club episode one did numbers. 100s of thousands of views and over 20k new followers across IG and TikTok 🤯 Truly feeling overwhelmed and grateful for the love and support. I left my job earlier this year and started making these videos with zero social media experience, so I’m figuring everything out as I go. Just propping up my iPhone on a table and yapping. But responses like this give me so much motivation to keep going, so THANK YOU.

But back to the video - I’m in shock that so many people found one of the driest topics in finance (tax loss harvesting) interesting, and I figured I would use this edition of the newsletter to clarify some things and address the questions.

Oh, and several of you asked about my nails. Bottom of the email. 💅

Okay, I’m going to take this kind of literally. I’m a firm believer that if you can’t explain something simply, you don’t understand it yourself. So let’s see if I can explain Tax Loss Harvesting in a super-simple way!

You’re now faced with two options:

So, how can you get the $25 of realized losses to reduce your taxes while still keeping $75 invested in the market?

You can’t just re-buy the same exact basket of stocks (eg. an index fund like VTI), because the IRS has a rule against that (Wash Sale Rule). But you can buy a very similar, but not exactly the same, fund that will perform almost identically, but is considered a different enough asset to the IRS.

So, to continue the above example, you go with option 3 - you sell your $75 position in VTI, get a $25 realized loss, and immediately invest $75 into a similar fund like ITOT.

That’s Tax Loss Harvesting. You still have $75 invested, but unlike the “do nothing” option 1, you also have losses you can use to reduce your taxes. Either to offset capital gains, or to reduce your ordinary income by up to $3,000 every year. If your total marginal tax rate (federal + state) is 40%, for example, that’s an extra $1,200 in your pocket at tax season.

You didn't lose anything you hadn't already lost. You just picked up a tax break for doing a little extra legwork when the market dipped.

The key here is that you’re not losing more money by harvesting tax losses. You’re just taking advantage of a tax quirk that lets you turn a decline in your investments that already happened into a “realized capital loss” which the IRS lets you use to reduce your taxable income.

First, in my experience, wealthy people can be even bigger penny pinchers than lower income folks. I know plenty of people making really high salaries that would absolutely take advantage of a $1,200 reduction in their taxes.

But second, $1,200 is the minimum you can save, not the cap. The $3,000 cap only applies to offsetting your salary. There is no cap on using losses against capital gains.

So someone selling a business, exercising options, or cashing out a big position can offset a ton of gains with harvested losses.

Because the $3,000 cap is only for offsetting ordinary income. Against capital gains, it's unlimited.

Someone with a $2 million gain and $2 million of harvested losses can wipe out the entire tax bill on that gain. No cap, no limit.

And they're harvesting continuously - every dip, all year, often automated - banking losses so they're sitting there when a big gain shows up. Losses carry forward forever, so the pile just grows.

That's the actual answer to "how do rich people not pay taxes." It's not one dramatic trick. It's things like this, done constantly, at scale, in addition to a bunch of other tax code tricks.

Nope! And that’s why it can be helpful to folks at totally different income levels!

The capital loss deduction is above the line. It goes on line 7 of your Form 1040, which is before the standard-versus-itemized decision happens.

Standard deduction? You get it. Itemize? You get it.

Right. This only works in a regular taxable brokerage account.

401(k)s and IRAs are already tax-sheltered - there are no annual capital gains taxes in there to offset, so there's no loss to harvest.

Fun answer: the wash sale rule doesn't currently apply to crypto, because the IRS treats crypto as property rather than a security, and the wash sale rule is written for securities.

Which means, as the rules stand today, you can sell Bitcoin et al at a loss and buy it back immediately. No 30-day wait, no need for a similar-but-different asset.

Then congratulations, you have nothing to harvest and you're making money. That's a good problem.

Your brokerage does it for you. They send a 1099-B every year listing every sale, your cost basis, and your gains and losses.

The one thing to actually watch: turn off automatic dividend reinvestment in your taxable account. That's the thing that quietly triggers wash sales without you doing anything.

Yes! There are a few ways:

Different country, different rules. Many have their own version, and many have their own equivalent of the wash sale rule with different windows. I only know the US system.

I want to be clear: this is legal tax planning under rules Congress wrote deliberately, not evasion. The whole premise motivating my Secrets of the Wall Street Boys Club series is that these tools already exist but are unevenly known - the people already using them are the ones who can afford advisors or come from backgrounds where they learned it from their families. Arguably more people knowing is the more equitable outcome, not fewer.

Finally, a real caveat from me: I'm not a CPA and this isn't tax advice. State rules vary, situations get personal fast, and if you're harvesting anything substantial it's worth an hour with a professional!

This one clearly hit a nerve, so I'm making Secrets from the Wall Street Boys Club a running series.

What else should I pull out of that world? Let me know by replying to this email and I’ll add it to my list!!

I’m one of those people who feels the need to read the book before seeing the movie, so I’m about halfway through Emily Wilson’s translation of Homer’s The Odyssey.

As unintellectual as this might make me sound, I’m finding it a bit boring so far. Granted none of the epic scenes that make this story famous have occurred yet, so I’m going to keep pushing through. Let me know if you’ve read it and what you thought! I can’t wait to see the film.

I’m adding this new section to the bottom of the newsletter to share some of my favorite products folks ask about, apps I love, etc.

💅 The nails. You asked, and I told you I don’t gatekeep!!! Any time you see me with my nails done in a video (which is NOT every video) it’s most likely press-ons from Chillhouse. I used to spend $100 and an hour of my time to get a full russian manicure, but these press-ons from Chillhouse cost $16 a set, get just as many compliments as the real thing, last up to 2 weeks, and I can apply them while watching the most random reality shows on my couch. I’ve tried cheaper ones, but I find they fall off more often, which I’ve learned people REALLY NOTICE.

If you want to try a set yourself, my favorite color and shape is called Sea Siren, and you can get 15% off using my affiliate link (my first ever Just Ask Hannah link! I get a 15% cut, woo woo) https://chillhouse.com/JUSTASKHANNAH-CHILL

☕️ inKind, still going. Flagged this in Volume 2 and I'm still using it constantly. Credits at local restaurants and coffee shops, referral bonus for both of us!

BTW, I earned exactly $3.36 from that ad in the last newsletter, so not sure that’s worth doing for now. Might try it again in the future if there’s a more compelling ad partner!

To the handful of people who just read the entirety of my ramblings - THANK YOU and I can’t wait to keep sharing!!!

xx

Hannah

Fine print: this is not financial advice and I'm not your advisor, just a person with opinions and a spreadsheet. This especially isn't tax advice - I'm not a CPA. For actual money decisions, please talk to a licensed professional who knows your full picture.