69: This Episode Will Save You Thousands (Seriously)

0:02Get your mother-loving ears on because your big time radio DJ's got news. PayPal lets you choose how you want to pay for all the stuff. With PayPal, I can pay in-store, pay online, or pay over time. What's that? You want this translated into song? I hope you're sitting down. You can pay your own way. You keep those ears on, you hear? Don't just pay, baby. PayPal. Learn more at PayPal.com. Hey, everyone, and welcome back to the Rich Habits Podcast, a top five business podcast on Spotify. My name is Austin Hankwitz, and I'm joined by my co-host, Robert Croak. Robert is a seasoned entrepreneur in his 50s with lifetime revenues of over$300 million, and I'm an entrepreneur in my late 20s with a background in finance and economics.

0:50Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business, and I actively advise some of the most well-known fintech companies around the world. Now, as the show name might suggest, every episode. We talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives, one from an industry veteran, which is Robert, and the other myself, someone who's still in the process of building wealth and figuring it all out. Robert, what are we going to be talking about in today's episode? In this episode of the Rich Habits Podcast, we'll be talking about the boogeyman of money, the taxman.

1:27This episode is going to be the nitty gritty of what no one wants to talk about, no one wants to hear about, and most people never learn about, and that is capital gains taxes, tax loss harvesting, and laying out the blueprint of what everyone needs to know about that subject. This topic is just as important as picking out what you want to invest in. Remember, it's not what you make, it's what you keep. So Austin, kick us off with an intro into capital gains and what they are and what they mean. Robert, I think you said it best, right? It's not what you make, it's what you keep. And this episode is titled, This Episode Will Save You Thousands for That Reason, right?

2:06So we're going to be talking about capital gains, tax loss, harvesting, and different tax strategies to save you thousands of dollars on your taxes every single year. So Robert, let's kick off with capital gains like you said. So what are capital gains taxes? These are the taxes you pay on the profits when investing. That's pretty simple, right? So as an example, if you invested $10 ,000 into Nvidia stock and it's now worth$15 ,000 and you sell it, that$5 ,000 in profits that you made, that's what you would pay taxes on. That capital gain of$5 ,000 is what you pay taxes on, capital gains taxes.

2:44Now there are two specific types of capital gains taxes. There are short-term and there are long-term. Short-term capital gains taxes are unfortunately taxed at your ordinary income tax rate. So like let's say if your effective tax rate's like 25 or even 30 percent, you know you're making hundreds of thousands of dollars a year from your job and other income sources, right? You'll be in that range. So you would then pay that same tax rate on that$5 ,000 in profit assuming it was a short-term capital gain. Now that title of short-term is defined as how long you held that investment for. So if you held that investment for less than one year, that $10 ,000 of Nvidia stock, you held it for less than a year, then you're going to pay that short-term capital gain at that ordinary income tax rate, which again is pretty high.

3:35But on the other side of the aisle, we have long-term capital gains. Now, these are profits that you've realized on investments that you made more than one year ago. So the cutoff between short-term and long-term is one year. That's the cutoff. So let's say you invested that same$10 ,000 into NVIDIA and it's worth that$15 ,000 we had alluded to, but you held your investment for 18 months, right? Longer than one year. The tax rate that you're taxed at because it is now that long-term capital gain is directly tied to how much money in total you made as a human being during that year. So if you as a human being made less than$47 ,000, then you actually don't have to pay taxes on your 5k in profit at all, right?

4:21That's long term capital gains and the cool things that come with it. If you made less than$518 ,000, you would only have to pay 15%, which is much lower than that 25 30%. And anything above$518 ,000 of profits that you had made that year is taxed at 20%, which is again, much lower than the 25 % to 30 % range that you would have at the short-term capital gains tax rate. So again, capital gains and understanding the taxes owed on those capital gains is very important because it's either short-term, which is your ordinary tax rate, or long-term, which is much more favorable. And something that I want to touch on, Austin, that's a great way to break this down, and I hope our listeners are taking notes here, is a lot of times what people don't realize with the short-term and long-term capital gains is when they're selling in and out of stocks trying to time the market.

5:15You always hear us say, don't try to time the market, is they're not considering the short-term capital gains taxes they're paying every time they sell in that timeframe. And I just think it's very important for them to understand every time you sell an investment like that, it is a taxable event. And when you're getting in and out and in and out trying to time the market. You have to take in that taxation amount against your profits. So make sure you really dig deep and understand the difference between short-term and long-term capital gains. Yeah. So, you know, as you guys might probably have seen now on your tax returns or other documents you get from your brokerage account, it's actually done on an annualized basis.

5:58So to Robert's point, if you're jumping in and out of, you know, investments, and let's say that you bought NVIDIA, you sold NVIDIA, you bought Apple, you sold Apple, you bought Amazon, you sold Amazon, you're having a good time, you're making money, whatever it might be. And you now see on this report, it's got detail explanation of every single thing you bought and sold and how much money you made on each of those trades. And now it says, okay, at the end of the year, you made$12 ,000 in profits, and now you owe taxes at that ordinary income tax rate on that 12 ,000. But, and this is something, oh my gosh, it's a mistake so many people make, Robert.

6:33I'm so glad you brought this up. So let's say that you made$12 ,000 in profits in 2023 on your day trading and you had a good time, whatever it was. But remember, tax day is not till April. And so maybe you've got that brokerage account with your$12 ,000 of profits in it, but you made one wrong trade and you blew up your account. Maybe you bought put options or you bought call options or you did some crazy risky investment that did very, very poorly and you lost your money. You still owe taxes on that$12 ,000 of profits, despite how much money you still have in this brokerage account after you made these trades.

7:08So what I'm trying to say here is you can have a great trading year of 2023. But immediately as the calendar turns to 2024, 2025, or whatever else, you need to take money out of your brokerage account and set it aside for those taxes that you owe on that calendar year. Because if you make silly trades over the next four months before the taxes are owed to Uncle Sam on that April date there and you lose all your money, it doesn't matter. Uncle Sam's still going to come knocking. He's going to say, no, no, no, I don't care what you have. This is what you said you had on these days and you should have known better to put money aside on those profits.

7:41I see it all the time, Robert. It's, oh my God. It's so important for everyone to understand these distinctions. Robert, let's now talk about how we'll be able to help our listeners save thousands of dollars every year on their taxes. Again, the name of this episode is this episode will save you thousands of dollars, seriously. And that's because there's a strategy called tax loss harvesting. We just talked about long-term capital gains, short-term capital gains, the taxes with that, but there's a strategy you all need to study up on that's gonna help you optimize these taxes to save when Uncle Sam comes knocking in April.

8:18So break it down for us, Robert. Simply put, this is a tax strategy that involves non-profitable investments and utilizing those losses to offset the gains from your profitable investments. Now, here's the key. The investment you sold at a loss is replaced or bought back again by a similar investment after a certain timeframe. We wanna always have our money working for us, but if we can sell our losing investments, realize those losses, then buy them back after 30 days, then we've gamed the system. So let's use an example. Lululemon, everyone's favorite athleisure company. Let's say you're like Austin and you love the stock.

8:59You bought 10K worth of the stock during the beginning of the year, and unfortunately you're down, let's say 40 % on your investment. So what you would do is sell your Lululemon stock, realize that$4 ,000 loss on your$10 ,000 investment. Then after 30 days, you take the remaining 6K and you invest it back into Lululemon. Now you have roughly the same amount of shares in Lululemon, but more importantly, you have a$4 ,000 loss to offset any realized gains made elsewhere in your portfolio. And another important component is that while you wait the 30 days before you can buy the stock again, is that you park that$6 ,000 into T-bills, CSHI, or even a similar investment like Abercrombie & Fitch, On Cloud Shoes, or even Ralph Lauren.

9:53These names move up and down 5 % to 10 % during that 30-day period, and now you even have more money to invest back into Lululemon. lemon. Now I know that was long-winded, but I promise you it is well worth everyone listening to learn. So Austin, give us a little more color and depth on this so everyone can really understand what this means. You know, Robert, and I think what's really, really important about tax loss harvesting is that if you are someone like myself or Robert or the other several hundred thousand and people that listen and follow this podcast, you are a net buyer of assets, right?

10:31You want to grow your portfolio over time. And you're focused on investing more and more every single year. That's single stocks, ETFs, cryptocurrency, and even real estate. So if you're someone who is a firm believer that I got 5, 10, 15, 20 more years of investing more money into my portfolio before I even want to sell, right? I'm not even close to retirement. So if you're someone like that, tax loss harvesting is a wonderful strategy for you to implement. Because if you're like me and you have some single stock losers in your portfolio, it happens. We're all human. Lululemon happened to me, right?

11:08So I'm down 40 % on my Lululemon investment. I love the stock still. I think they're very undervalued from a long-term perspective. You look at their historical PE ratio, I don't want to nerd out on y 'all here, but I like the stock. But because I'm down 40 % on it here year to date, now is a great opportunity for me to sell that, realize my loss on that investment, which is a couple thousand dollars, wait the 30-day period there, and then buy back Lululemon stock. Because if you think about it, since I sold it, waited a little bit, and then bought it back, I now have essentially the same number of shares as I did when I first purchased it back at the beginning of the year.

11:47And so that's what we want people to understand, right? If you are a net buyer of assets and you have no reason to cash in on that crypto, cash in on your Nvidia or your Vital Farms like Robert's doing, right? This guy's always right with his stocks. I love it. If you don't need to sell and realize those profits yet, then this is a great opportunity for you to begin to, Robert, remember back in the day when you had like minutes or I think like points and stuff with like AT &T and Verizon and like if you didn't use all your minutes that month, that would roll forward to the next month and you can use them.

12:19That's what people are doing with tax lost harvesting. They are realizing losses in the year of 2023, 2024, 2025, rolling those losses forward year after year after year until they have that big sale. They cash in on the Bitcoin, they cash in on the Nvidia or whatever it is. And if you have 20, 30,$40 ,000 of losses, you've rolled forward year over year, and you have$40 ,000 of profits that you would, you know, have to pay taxes on, the losses you've incurred over the last couple years completely offset that$40 ,000 profit that you have just realized, making it so you don't pay any taxes, right?

13:01That's why Robert and I are talking about this on the podcast, because one, it's going to save you a lot of money in the long term. But two, no one is doing this in a way that is meaningful, which is why we have Mo, the CEO of a company called Frec, F-R-E-C.com. And Frec automates the tax loss harvesting process for you with the S &P 500. So if you are an investor in the S &P 500 like we are, and you're always going to be buying more and more of it, his company Frec.com has automated the tax loss harvesting process. And don't just take our word for it, Robert. I mean, we put$20 ,000 into his platform so that we can see for ourselves how much we're saving on taxes, what the performance looks like, and it's been great.

13:41So stay tuned for that interview here in a little bit. Mo's gonna hop on here, but it's just so important, Robert, I think for our listeners to understand this because this is what the wealthy are doing, right? This is what the family offices, the billionaires, like this is how they keep more money in their pockets at the end of the year. That is why I love waking up every day and getting to do what I do. We're not gatekeeping here. We give it all away. We make sure everyone gets the best information because we want every one of our listeners, everyone that's joined our rich habits community to win at the game of life and investing.

14:13And so this is a really great episode. And I hope everyone is difficult of a topic it is that they stick with this episode and really dig in because it is life-changing information that they can implement into their wealth building strategies. But Robert, before we bring Mo onto the show, I want to tell all of our listeners about this episode sponsor, Blossom. They not only allow us to invest, but also share those investments with all of you guys. Yes, Blossom is a social investing app built around transparency. Simply sign up for a free account, connect your existing brokerage account like Fidelity, Robinhood, Vanguard, or Schwab, and get started.

14:53Unlike anonymous platforms like Reddit and Twitter, Blossom users link their existing brokerage account to the app so that all of their holdings and portfolios are shared within the feed and verified by actual data. So leading to richer discussions and decisions, it's never been easier to join a community of like-minded investors focused on building long-term wealth together. Yeah, it's really cool, Robert, because when you sign up, you get to actually tell the app what you're interested in. So for me, I chose dividends, I chose passive income, and I chose options. And so whenever any of the other community members, there's over, I think, 150 ,000 people that use this app every month talk about dividends, passive income and options.

15:36It's right there on my feed. They also offer a one-stop shop dashboard for tracking all of your investments, right? They have a dividend tracker, dividend forecaster, sector breakdowns, and much more. Yes. And make sure everyone understands Blossom is not an online broker. You're not investing into stocks on Blossom. They're simply a social app network for investors that want to connect with other investors. And did we mention they have 120 ,000 active users across both Canada and the US. So go sign up for Blossom using the link in the description of the show notes, and we'll see you there. All right.

16:13Let's hear from Mo. All right. Let's dig in. Let's bring Mo on. Mo, welcome to the show. Okay. So Mo, walk our listeners through direct indexing and what Freck does to automate this tax loss harvesting for its investors and what makes it different and special. Walk our listeners through that. Yeah, absolutely. So direct indexing is a strategy that gets you passive index performance, but with tax losses as an added benefit, right? So it's similar to owning and buying an ETF like SPY, for example, but you get SPY performance plus tax benefits, right tax losses frack does that is unique is it provides that at the same cost as pi's expense ratio which is around 10 basis points and the way it does that is instead of buying a piece of the fund it's going in and buying the individual stocks that are underlying you know the index itself so if apple is at seven percent it would buy seven percent apple then it would buy some exon and nvidia and costco and everything else and now it owns all the 500 stocks in the index right and And what it's doing is on a daily basis, monitoring all those holdings.

17:22And anytime it sees an opportunity to tax loss harvest, meaning to sell something, buy a correlated basket, wait 30 days, buy something else, it will do that motion with automation and software. And it's doing that every single day. So it's always constantly looking out for tax loss harvesting opportunities and booking these tax losses for you. So at the end of the day, you get the performance of the index, but with the added benefits of tax losses that you can use at the end of the tax year to offset your gains. So this is amazing. Tell me so I understand. Why aren't all the big houses doing this?

17:55What makes you special and different that everyone isn't offering this? Because it seems like such an incredible strategy to get those added benefits of tax loss harvesting all the way through the cycle of owning that investment. So why? Great question. So the funny thing is, this is a very popular strategy with family offices. You go to family offices who are managing billions in assets, and a lot of them are tax loss harvesting and have been direct indexing for decades now. So it's sort of like an old strategy. What it required in the past was very big minimums. Just to try the strategy, you needed a million dollars, right?

18:34And it was very expensive and there was trading fees and just running the software every day was costly. And, you know, it was very prohibitive to do this. And, you know, today it's kind of come down market from a family office a bit in terms of now you can access it through a wealth advisor. If you have a wealth manager at Fidelity, you've got one at Goldman Sachs, they'll probably talk to you about this. This is, again, super common and growing as a category, growing really fast. Sometimes you refer to this as an SMA account, separately managed account. So what happened was everything's changed in the past couple of years.

19:05Whereas now you can do fractional share trading, right? We've all seen how on Robinhood you can buy 1.5 shares of Apple, for example, or whatever. So now this has become common. So we can do a direct index of the S &P 500 with$20 ,000. You don't need a million bucks anymore. You can do it with$20 ,000. The fees have come down. There's no commissions every time you buy and sell, right? That was a big piece of friction in the past. So now that has, you know, there's zero commission trading. So we can trade all day long. And then, you know, finally, the cost of compute has come down. So to run these optimizations every day, we take that for granted.

19:37Oh, it created this and that. But, you know, that operation to figure out what to buy and what to sell at the tax slot level, you know, is quite expensive. And so now with the cost of commute come down, that can happen for everyone quite easily. So those are kind of the forces that made this strategy now more accessible to everyone else. Again, that is such a powerful technology. And that's why Robert and I took$20 ,000 of our own money and deposited it into the the Freck Direct Indexing Platform. We're now tracking the S &P 500 as well as, you know, enjoying the tax loss harvesting automation that you guys are doing for us behind the scenes.

20:13I mean, we're already up a couple hundred bucks because the S &P is up today and we've already tax loss harvested like$12. How fun is that? Like it's just all happening behind the scenes. You guys are doing it for us completely automated and we're really excited about that. I also want to encourage our listeners to consider doing something themselves with their own portfolio, right? If you are investing in the S &P 500 and you have tens, if not hundreds of thousands of dollars parked in these index funds, why not just transfer that over to a platform that's going to do it for you just like you're doing it already, but tax loss harvest on your behalf behind the scenes.

20:48Mo, is there any additional information you want to share about or anything you want to encourage people on as it relates to FREC and the tax loss harvesting and direct indexing, anything like that? Awesome. I'm so excited that you all are trying out direct indexing on FRAC today. So one of the more popular features that we have is we have got a self-directed account on FRAC that you can borrow against. So we have a line of credit that you can sort of like borrow up to 70 % of your portfolio value in both your direct index account and your self-managed account on FRAC. And it's priced very competitively at the Fed plus 1%, which is 6.33%.

21:22And if the Fed starts cutting the rates, those rates will come down. And so that's a feature that exists today. Think of it as borrowing against your stocks is similar to borrowing against a house, like taking a HELOC or taking a mortgage, right? And we give our customers a bunch of tools around understanding the risk by doing so, seeing how far they are from a potential margin call. There's ways to do this in a way that is risk averse. We sort of want to be very transparent with our customers on how to use that product responsibly. Obviously, you can trade on frack just like you would anywhere else without any commissions or fees from our side.

21:54There's the SEC standard fees that you do get when you trade a stock or an ETF, but you can do that as well today on FRAC. Very cool. Well, Mo, thanks so much for joining us on this episode of Rich Habits Podcast and breaking down for everyone tax loss harvesting, direct indexing, and why it's so important for our listeners to consider these strategies as they build wealth over the coming years and decades. Hopefully, we'll have you back here very soon. Thank you so much. It was a blast. Thanks for joining, Mo. See you soon. Wow, that was an amazing conversation. I think I learned some and we really got down to the nitty gritty on tax loss harvesting and I love it.

22:31So, so cool. So I am ready to jump into the rest of the episode, but that was awesome. I definitely learned a lot. And again, I want people to know here, Robert and I took$20 ,000 of our own money and we opened up a direct indexing account on Freck. We'll include a screenshot right now if you want to see it. We've made about$10,$12 of tax loss harvesting. We're up about$200 because the market's up today. Pretty cool. but just want people to know like we are doing this. We're not just endorsing it. We're not just having them on the show. We're taking our hard-earned money and we're putting it to work with this platform.

23:02So major shout out to Freck for not only sponsoring a webinar we had with them before, but also this episode and coming onto the show and educating our listeners as to how important direct indexing and tax loss harvesting can be. All right, our first question comes from Jeannie. We got this question via email at richhabitspodcast at gmail.com. If you have a question, send us an email or a DM on Instagram at richhabitspodcast. Which by the way, Robert, there's some scam Instagram accounts trying to be our podcast. We are never going to DM you asking if you like the show, ask for money. Like we're not doing any of that.

23:35So please, please, please, please, please do not ever send money to anyone on the internet, especially if they're pretending to be me or Robert. Ask for a FaceTime video, ask for a selfie, hop on a call. Like these people are so good at scamming. So please do not get scammed. Definitely be careful out there. Our first question comes from Jeannie. Jeannie says, Hi Robert and Austin. I love the podcast. I have officially now listened to every single episode and it has really changed my outlook on life so much. So I'm excited to submit my first question for the pod. My name is Jeannie and I'm 26.

24:07I make$105 ,000 a year from my W2 salary job and between$20 ,000 and$35 ,000 a year with my side hustles. I do marketing and communication consulting. My husband makes around$145 ,000. However, we treat our finances separate and we just kind of split expenses. Now, I personally have$80 ,000 in my 401k,$30 ,000 in my Roth and individual accounts with a blend of dividend yielding ETFs that you guys talk about, specifically SPYI and QQQI. I have$12 ,000 in an emergency fund. I own my home with my husband. We put over 20 % down last year. We have no debt besides the mortgage at a 5 % fixed interest rate, and we have no car loans.

24:48It's nothing. Now, here's the thing. We have our$100 ,000 base. What do we do next? I really want to diversify and invest in something that's going to increase my monthly cash flow. So what are my next steps to getting there? Wow. Oh my gosh. Jeannie and Jeannie's husband. 26. I don't know how old your husband is here. Crushing it. You guys are chosen. Crushing it. Golly. I hope you guys realize how blessed you are. I'm sure you worked very hard to be where you are. And you obviously are very focused on investing, which is very disciplined. And you guys have all the right characteristics. But you guys are very, very different and weird and not normal, right?

25:24Normal is broke. You guys are not broke. So Robert, I think the real thing here that I'm seeing, two things. One, combine your finances. You guys are married. You're not roommates. Stop pretending like you guys are roommates. If you guys both want to retire early, you guys should both be working toward that. That's my philosophy. Of course, if it's an abusive relationship or if drugs and alcohol in the picture, keep them separate. But it doesn't seem like that's the case here. So with that being said, you know, Robert, they want to retire early. They want to increase their monthly cash flow. How do you suggest Jeannie and her husband achieve that?