Citizen Kaine Could Be Reducing His Tax Bill — But Isn’t

Loss harvesting is an easy and entirely legal way for individuals with financial assets outside of their retirement accounts to reduce their tax liability. Here’s one way to do it (but far from the only way): (1) Buy shares of ten different stocks or mutual funds. (2) On a periodic basis, sell your shares of the stocks or funds that are down (but not the ones that are up) and reinvest the proceeds (without running afoul of the wash sale rule). (3) When you file your taxes, apply your capital losses to reduce your taxable income by up to $3,000 (as section 1211 permits), and carry forward any additional losses to future years. The strategy can result in individuals facing a negative effective tax rate on investment income because losses are deducted from income taxed at ordinary rates whereas gains are taxed at the lower capital gains rate (or never taxed if you hold the investment until you die to take advantage of the basis step-up under section 1014).

One thing that’s interesting to check when politicians release their tax returns is whether they’re taking advantage of tax loss harvesting. Often they are. Barack and Michelle Obama claimed capital losses of exactly $3,000 every year since 2005 (except in 2008, when they reported a capital gain of $1,107). George and Laura Bush did so from 2001 through 2005 (though reported substantial net gains in 2006 and 2007). Hillary and Bill Clinton have claimed capital losses of $3,000 every year since 2008.

To be sure, some individuals realize such large gains — voluntarily or involuntarily — that they can’t loss-harvest; Dick and Lynne Cheney found themselves in that enviable position throughout Cheney’s time in office. Others don’t have sufficient wealth to engage in the strategy; Joe and Jill Biden, who own no stock, appear to be in that position. (Bernie and Jane Sanders appear to have most of their wealth in real estate, which also makes loss harvesting hard.)

Interestingly, Tim Kaine and his wife Anne Holton aren’t harvesting losses even though they appear to be in a prime position to do so. According to their most recent financial disclosure, they hold somewhere between $361,000 and $815,000 in 11 different mutual funds plus somewhere between $15,000 and $50,000 in General Electric stock. (This doesn’t include assets in their children’s trust.) Individuals with financial assets in that range are wealthy enough to utilize — and benefit from — a loss harvesting strategy, and yet Kaine and Holton don’t appear to be doing it. Instead, they have reported a net capital gain of $14,674 in 2008 and have reported gains between $0 and $408 in the years since.

Why not? Maybe they think that tax loss harvesting, even though legal, is unethical (as Michael Edesess has suggested). Maybe, like Oliver Wendell Holmes, they derive positive utility from paying federal income taxes. Maybe all of their holdings have always appreciated in value (though that seems unlikely; some of the mutual funds in which they own shares are bond funds that have sustained substantial losses in recent years). Maybe they are unaware of the strategy (though that would seem surprising — in recent years their returns have been prepared by a Richmond attorney, Nancy Newton Rogers, who presumably would have informed them about the possibility of loss harvesting).

None of this is intended as a criticism of Kaine and Holton — only an observation. Kaine and Holton probably could reduce their tax liability with relative ease, but haven’t chosen to. They thus draw a stark contrast with Donald Trump, who boasts that he pays the IRS “as little as possible” because “[t]hat’s the American way.”

[For presidential tax returns dating back to Franklin Roosevelt, see Joe Thorndike’s Tax History Project. For the Clintons’ tax returns dating back to 2007 and Kaine and Holton’s tax returns dating back to 2006, see HillaryClinton.com.]