Tax Swap

If you trade your tax bill with Jeff Bezos, does that mean you get his income too?

Actually, a tax swap doesn't refer to trading tax liabilities with someone else. Instead, it's a maneuver meant to take advantage of a capital loss, even though you want to maintain the loss-inducing investment.

If you take a loss on an investment, you can deduct the loss on your taxes (after all, you have to pay taxes on capital gains, so why shouldn't you deduct the losses?). Unfortunately, to take the loss, you actually have to, uh...take the loss. In other words, you have to sell the investment and book the loss, in order to deduct it from your taxes. A paper loss doesn't count.

So a tax swap involves selling the investment that has the loss, then buying a new investment that's pretty similar (though it can't be exactly the same; the government is onto that trick).

You own shares in a major (legal) drug maker that have fallen in the past few months. You are now $2,000 underwater on the investment, and want to deduct the losses on your taxes. In order to achieve this goal, you sell the shares and lock in the loss. Then you take your capital and buy a drug-maker ETF, which happens to have the stock you just sold as its highest-weighted component.

You didn't sell and repurchase the same stock. You bought a different vehicle with similar exposure. You still have an investment in the sector you had before...plus, now you've got that $2,000 tax deduction.