Thesis
Verizon Communications Inc. (NYSE:VZ), currently provides a ripe opportunity for tax loss harvesting for many investors.
The share price is down significantly; 31% from 52 week highs, 50% from 5 year highs, and is within pennies of the lowest price in 13 years, with the bulk of the decline since June 2022.
As a result, many investors have significant unrealized long term capital losses, which can be realized to reduce taxes in 2023 and potentially future years.
Investors whose plans include maintaining a long term position in VZ can still take advantage of tax harvesting by buying new shares and selling the old shares before year end.
This may be particularly attractive to investors who expect their heirs to eventually inherit these shares and apply a step-up in basis.
While there are timing and other issues to be aware of, many investors may find this option worth considering.
Verizon Communications Provides An Opportunity
VZ shares are among the most widely held by individual retail investors, often with long holding periods. Recent share price declines have left many of these investors with unrealized long term capital losses.
Recall that capital gains and losses only apply to taxable accounts. This is all moot for securities held in IRAs.
In addition to investor initiated trades, owning some mutual funds may generate significant long term capital gains with no action on the part the individual; Vanguard’s Health Care Fund (VGHAX) for example has already returned $2.80 per share in long term capital gains in 2023. Vanguard’s Total Stock Market Index Fund (VTSAX) on the other hand has returned zero long term capital gains in 2023.
We are going to focus here on the simple case of long term capital losses, where “long term” means investments held for longer than one year.
We are also going to limit the discussion to Federal taxes, and the most common situation. You can read the 20 page IRS publication Instruction for Schedule D Capital Gains and Losses here to get a sense of the scope of the special cases.
The tax consequences of selling an asset, including stock, are also discussed in the IRS publication Topic No. 409, Capital Gains and Losses.
We are also going to ignore state taxes, which may apply depending on your state of residence. Tax considerations are unique to each investor, and should be reviewed with your tax professional.
In this article, I will make an estimate of the size of the opportunity (i.e. is it worth doing at all), the primary timing consideration (the wash sale rule), offer some comments on whether an investor might want to continue to own VZ at all, and explain what I am doing personally.
The Size of the Opportunity
We can use an illustrative example to make a back of the envelope estimate of the size of the opportunity.
Cost Basis
We first need a cost basis. We can look at the 10 year period between 09 October 2012 and 09 October 2022. Any purchase or inheritance during this period would create a long term capital losses if sold now.
What we see over those 10 years is an average price of $51.52. We will assume this as the acquisition price for our example, noting the caveat that every investor’s specific case will be unique.
Sales Price
The closing price on 06 October was $30.85. The price range for that week was $30.16 to $32.44. To make the math simple, we will use $31.52 as our example sales price.
Capital Loss Per Share
Given our example $51.52 basis and $31.52 sales prices, we conveniently calculate an even $20 per share capital loss for our example.
Each individual investor’s case will be different; the key point is that the per share capital loss is material for many investors.
Position Size
We will assume a position size of 500 shares. I think this is probably consistent with what many Seeking Alpha readers might own.
With these prices, an investor holding 500 shares of VZ has an unrealized long term capital loss of $10,000.
2023 Long Term Capital Gains
We will assume $6000 of long term capital gains from other sources (sales, mutual funds), in part to allow illustration of how the capital loss is used.
Tax Rates
Vanguard provides a convenient summary of tax rates and other useful tax planning information here. For the married, filing joint returns, long term capital gains are taxed at 15% for taxable incomes from $89K to $554K. Investors with less than $89K in taxable income enjoy a 0% rate on long term capital gains.
Taxable income from $89K to $364K carries a marginal rate of 22-24%.
For our example, we will assume a 15% rate on long term capital gains, and a 22% rate on ordinary taxable income.
Our Example
Our example is summarized below. The process is:
- carry forward any long term tax loss from previous years (we assume zero here)
- compute the long term capital tax loss for 2023
- apply the loss to reduce 2023 long term gain to zero, or until the loss is used up
- apply any remaining loss to offset up to $3000 of ordinary income
- carry forward any remaining 2023 loss for use in future years
This appears to be a sufficiently worthwhile opportunity to at least merit consideration.
The Wash Sale Rule
If an investor wants to liquidate their VZ position, they can simply make the sale and harvest the tax loss.
If an investor wants to maintain a long term VZ position, they can make the sale and buy replacement shares, and still harness the tax loss, but must comply with the 30 day wash sale rule to preserve the tax benefit.
Per IRS Publication 550,
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade,
Acquire a contract or option to buy substantially identical stock or securities, or
Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
An investor can sequence their buy and sell trades in two ways to comply with this rule:
- buy-wait-sell
- sell-wait-buy
If you select buy-wait-sell, be sure to sell the older long term shares. Your broker will probably offer a first-in-first-out “FIFO” option to make this automatic, and it’s simpler than trying to designate specific lots to sell.
One might also wait 35 days rather than 30 to remove any ambiguity in meeting the 30 day rule.
The IRS appears to default to a first-in-first-out “FIFO” rule. From IRS Publication 551, Basis of Assets:
If you buy and sell securities at various times in varying quantities and you can’t adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first.
Do I Want to Own Verizon At All?
Note: I did the analysis for this section on 30 September 2023, and it was the basis for my trade. VZ has dropped another 5% in the week since then.
VZ’s performance has not been great. Since 01 January 2020, the total return for VZ has lagged AT&T (T), arguably its major competitor over that period, and dramatically lagged the total stock market, particularly since about 2016. Inflation from January 2000 to today was about 82%, using the All Urban Consumers (CPI-U) index computed by the Bureau of Labor Statistics CPI Calculator. VZ provided a real return (before taxes), but it was quite small.
Results over the last 10 years have been similar. Inflation over that period was about 31%. VZ didn’t provide a positive real return.
Multiple articles on Seeking Alpha and elsewhere have pointed out that VZ is in a highly competitive business, with very high recurring capital expenses, and carries a very large debt burden. Recent ratings however, are an almost uninterrupted series of Buys and Strong Buys.
On the other hand, VZ’s share price is near a decade low.
And well below the average over the most recent five years.
Wall Street (in this case 20+ analysts) suggests a price target of $40.55, with 25% upside. The 52 week high is $44.73. One major firm suggests a fair value of $54.
Of the 12 Seeking Alphas articles in September 2023, 3 rate it a STRONG BUY, 7 are BUY, and only 2 a HOLD. There is a degree of enthusiasm, for good or ill.
Short interest is 0.98%, compared to 1.64% for T.
My overall assessment is that VZ is at least a fair, and perhaps a very good, value at this price. I plan to hold it for the very long term and am satisfied to buy it here.
What I Actually Did With VZ Shares
My Position
My VZ shares are held in a joint taxable account, in a community property state. Our tax filing status will be married filing jointly.
Under my asset allocation plan, this is a full position. I view it as a very long term holding – multiple decades.
I expect these shares will eventually pass to my heirs by inheritance, and under current law, they will receive a step-up in basis to fair market value at that time.
My initial VZ position was inherited in 2019. These shares were originally acquired decades ago, and the cost basis was stepped-up at the time of inheritance to the then $55.16 market value.
I added several small tranches in 2021 and 2022, at prices between $49.90 and $38.00, doubling my share count.
The average cost basis for the entire position is now $49.98. The holding period of all of these shares is now long term.
As of 30 September, VZ last traded at $32.41. That gave me an unrealized paper loss of $17.49 per share.
My Trade
I executed the first leg of the buy-wait-sell trade on Monday 02 October 2023, buying via a limit order at $32.41. This provides an 8.2% yield on cost.
I plan to wait 35 days (I prefer to be unambiguously outside the wash sale window), and sell the old shares, FIFO, on or about 06 November 2023. The exact realized loss will depend on the market price at that time, but I expect about ~$18 per share.
Risks and Issues
1. Tax law may change in the future.
This transaction is attractive in part because some capital gains may not just be delayed, but entirely avoided, by taking advantage of the step-up in basis provision for inherited shares. There have been proposals to eliminate this feature of tax law. If step-up was eliminated, this would mean eventually paying capital gains computed on the lower basis created with this transaction.
2. The buy-wait-sell strategy that I outline here requires an investor to have and commit cash to make the initial buy; ~ $16K for out 500 share example.
3. A significant drop in price over the waiting period could mean that the cash used to make the buy is not fully replenished by the sale.
4. A significant rise in price could make the tax loss harvest smaller, but that’s probably not a bad problem to have.
5. The sell leg of the trade must be completed before the end of the year to capture the loss for 2023.
Investor Takeaway
Verizon last traded at $30.85, 31% below its 52 week high, and 50% below 5 year highs. Most of this decline is fairly recent, leaving many longer term holders with a compelling opportunity to harvest 2023 tax losses before year’s end. Similar tax loss harvesting opportunities exist for other securities as well.
It seems reasonable to conclude that VZ is probably a fair, perhaps a very good, value here. With a $2.66 dividend, it currently yields a very attractive 8.6%.
With proper timing to avoid a wash sale, investors can maintain their position and still harvest the tax loss.
I would rate it a BUY at current prices, although I do not plan to add net shares, primarily due to my asset allocation targets.
The opportunity to harvest the tax loss appears attractive, and I am personally acting on it.
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