What happened
Shares of companies tied to the electric car industry, from start-up EV manufacturer Faraday Future Intelligent Electric (FFIE +19.02%) to Blink Charging (BLNK +18.61%) and ChargePoint (CHPT +0.47%) -- which, as their names suggest, both operate networks of chargers for electric cars -- tumbled in early trading Monday. As of 10:45 a.m. ET, Faraday shares are down a disheartening 11.7%, while Blink is losing 6% and ChargePoint has been drained by 8.5%.
Given that there's no obviously negative news on the wires about any of these companies today, however, there seems only one logical explanation for the selling: tax loss harvesting.
NASDAQ: BLNK
Key Data Points
So what
With barely a dozen days left in the year, and even fewer trading days for the stock market, 'tis the season to sell your losers, it seems.
Shares of ChargePoint have lost 51% of their value since 2022 began -- a loss more than twice as bad as that of the broad S&P 500 index of companies. Blink stock's done even worse -- down 55% for the year. And pity the poor investors in Faraday, who've seen 95% of their investments vaporize in less than 12 months.
It almost goes without saying, at this point, that none of these three companies are profitable yet. Even with help from the Biden administration and its push to build an extensive EV charging infrastructure (bolstered by tax incentives for sales of electric cars), analysts polled by S&P Global Market Intelligence estimate it will be at least four more years before even the foremost of these three companies (ChargePoint) earns a profit.
Now what
That's a long time to ask investors to hold on to losing investments while crossing their fingers and hoping their companies will make it. In contrast, by taking advantage of a quirk of the U.S. tax code, investors can at least use their losses on these stocks to offset gains in luckier investments -- and they can do that as early as April.
It works like this: Any capital gains an investor has earned from selling one stock can be offset on an income tax return by an equivalent amount of losses incurred from selling a different stock. What's more, if the second stock's losses exceed the profit earned from the first stock, an investor can use $3,000 of any "extra" losses from the first stock -- subtracting them from the taxpayer's income to reduce income taxes in 2023.
The strategy is called tax loss selling or tax loss harvesting, and it's a popular way to reduce anticipated income taxes on a future tax filing. The key, though, is that you must sell both your losing stock and your winning stock in the year those losses or gains are taxed (2022 in this case) in order to offset the gains with the losses in the following year (2023). With this calendar flip mere days away, I suspect that's what a lot of investors are doing right now: selling unprofitable EV investments to offset gains from more profitable investments in other sectors, such as energy.
Now, the flip side of this phenomenon is that selling pressure on stocks that declined in 2022 should abate as soon as January rolls around. For folks who believe 2023 might be kinder to EV investments than 2022, this could mean a wave of new investment in stocks like Blink, ChargePoint, and Faraday in early 2023 that could push their prices higher.
Just be careful: If you decide to adopt this strategy, first make sure you read up on this other quirk of the tax code before you sell these stocks...then buy them back again.
