Holding Gain vs. Tax Loss: How You Can “Lose” and Still Be Ahead
You’re looking over your quarterly performance review. There it is—one of your investments is proudly showing a healthy gain. You feel good about it.
Later, you pull up your brokerage statement. Same investment… but this time it’s showing a loss. Not just a tiny dip—an actual negative number in the gain/loss column.
You stare at it for a moment. Which one is right? How can the same holding be up in one place and down in another?
Here’s the twist: both are right.
Two Different Ways to Measure the Same Investment
What’s happening comes down to two ways of looking at investment results: holding gains and tax gain or loss.
Holding Gain or Loss
Your holding gain represents your total gain or loss in a position and is likely what investors actually wan to know. Are you making money or not.
Holding gains or losses are calculated by taking the difference between what you invested in the position and what the total position is worth including any reinvestment of capital gains, dividends, and interest.
Holding Gain/Loss = Ending Position Value minus Initial Investment.
This calculation is generally what shows up on performance reviews.
For example, if you invested $10,000 in a position and that position is now worth $11,000, you have a $1,000 holding gain.
Tax Gain or Loss
What often confuses people is that the tax gain or loss can be different depending on the investment. It represents the gain or loss that would be recognized at the time of sale.
Tax Gain/Loss = Ending Position Value minus Cost Basis
This calculation often shows up on statements, tax documents, and trade confirmations.
For example, you invested $10,000 in a position and that position is now worth $11,000, if you sell that position, you’ll have a tax gain of $1,000.
How They Can Deviate from Each Other
Now you might say. Those are the same numbers – and you’re right. But they start to deviate when you start to add in the total return picture of dividends, interest, and capital gains.
How You Can Have a Loss on Paper but Still Be Ahead Overall
Let’s assume you invest $50,000 in a fund that pays $125/mo in dividends. Annually, it also makes capital gains distributions of $3 per year. You reinvest both dividends and capital gains distributions which means you are buying more shares with them.
When you receive dividends, you can buy more shares when the price is low or you can buy fewer shares when the price is higher. When you do so, you increase you cost basis in your position.
When you receive capital gains, they are also used to purchase additional shares based on the current value. However, when funds pay capital gains, the fund price typically drops by the value of the capital gain distribution. In the end, you’ll end up with the same overall position value with more shares and increase your cost basis in the position.
The end result?
Your position value has increased to $56,075. This equates to a $6,075 gain or a 12.15% increase in value. However, your statement will show a $101 loss on the whole position!
The above formulas for holding versus tax basis have one key difference: what is subtracted from the position value. In the case of holding period, it’s the original investment only. In the case of tax, it’s the cost basis which includes capital gains distributions and dividends reinvested.
Bottom line: Your portfolio is ahead overall, but individual tax lots can still show losses—something that can even work in your favor for tax planning.