January 2026 Best Buys

When Investors Sell Shares To Gain Year-End Tax Losses

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Yellow was not John Schrag’s color.

Particularly when it was in his beard, in his mouth, dripping into his eyes, and defacing most of his farm buildings.

But the Liberty Loan Enforcers figured John deserved a gallon of paint to the face, plus a few more sloshed over his property. After all, he was a yellow-bellied coward who wouldn’t buy Liberty Bonds.

Pacifist John, a Mennonite farmer from Arkansas, didn’t believe in funding wars. And Liberty Bonds – government bonds earmarked to fight the Germans in World War I – were just a poorly-disguised war tax. John said as much... in German, his native tongue.

That went over as well as you’d expect.

Coughing through the paint, John offered the Loan Enforcers $200 to give to the Red Cross instead. They refused. He raised his eyes in prayer. They tossed a noose around his neck and jostled him in the direction of a big tree.

It was 1918, and Americans on the homefront had a simple choice: Buy government debt or take a bath in paint.

Or worse.

Unsurprisingly, the aggressive bond drive was a Democrat initiative – helmed by the progressive dream team of President Woodrow Wilson and Treasury Secretary William McAdoo…

Americans were still relatively new to the idea of an income tax – the first modest compulsory tax hit the books in 1913 – but with the doughboys headed to France in 1917, Wilson needed to beef up his war chest, fast. The President tasked charismatic McAdoo – who was also his son-in-law – with funding the Great War, an ambitious project that would cost around $32 billion, over half the gross national product.

McAdoo’s financing plan was two-pronged. He’d tap the country’s richer folks (making $5,000 a year or more) with a steep mandatory income tax, anywhere from 13% to 77%. And he’d heavily encourage the poorer folks to buy war bonds – a government loan that matured in 30 years and paid 3.5% interest.

Assisted by Ed Bernays, famed con man and father of the shadier side of American advertising, McAdoo blitzed the country with flashy “Liberty Loan” campaigns. He dropped leaflets from airplanes and plastered walls nationwide with guilt-tripping posters: “If You Can’t Enlist, Invest!” and “My Daddy Bought A Bond. Did Yours?”

Buying war bonds was voluntary, with a heavy side of “or else.”

Ku Klux Klan-style bands of volunteer Liberty Loan Enforcers roamed the country searching for “bond slackers” like John Schrag. There were also more organized efforts: During an event called Policemen’s Day, teams of policemen canvassed towns knocking on doors with “pointed suggestions” that the folks hiding behind those doors go out and buy a bond or two.

As one Colorado newspaper described it: “Every person, without exception, will be visited and solicited... (W)here those solicited make disloyal remarks against the government or criticize the merit of the government bonds, or are discourteous toward the lieutenants, detailed reports will be made and the matter turned over to the secret service department for investigation.”

Schrag didn’t swing, in the end. A local sheriff stepped up and threw him into jail to keep him from being lynched. Later, when he was hauled before federal court in Wichita, Kansas, the sedition case against him fell apart. No one could prove he’d said anything against the government, since he’d mainly spoken German.

Other “slackers” weren’t so lucky. One community of farmers in South Dakota refused to pony up for war bonds, so the Loan Enforcers confiscated their entire livelihood: 100 head of cattle and 1,000 sheep. A group of five dissenters at a factory were “taken by the heels... and dipped into a steel tank used for heating oil for the colliery engines.” Not surprisingly, everyone at the factory took out a Liberty Loan the next day.

Aided by these types of gentle incitements, war bond turnout was impressive, with 20 million people (out of just 24 million households in America) buying $17 billion worth of the securities. Another $8.8 billion rolled into the coffers from the double-digit tax on the well-to-do. The press lionized McAdoo’s cash grab as “the most magnificent economic achievement of any people… inspired by the finest and purest patriotism.”

In reality, America’s rich people – just like poor folks – were tired of McAdoo’s crap.

Early on in the increasingly expensive war effort, the nation’s 1% also figured out ways to dodge McAdoo’s tax, while avoiding the hangman’s noose and buckets of yellow paint.

Assets disappeared into complex corporations and Swiss banks. Clever accounting magicked away millions... on paper, anyway.

But perhaps the most ingenious tax shelter was the “wash sale.”

Washed Overboard

Wash sales, or tax-loss sales, are a way to report a temporary loss on your stock holdings for the year, so you won’t have to pay taxes on those gains.

For instance, let’s say you have $100,000 in capital gains and are holding a losing stock at year-end that's down $50,000... If you keep holding the losing stock, you'll owe taxes on the $100,000. But if you sell the losing stock before Dec 31, you reduce your tax bill down to $50,000. Then you can buy back in – ideally, at a nice discount.

Wash sales first popped up in an “innocent” letter to the editor in The Wall Street Journal in November 1920, where a reader known only as R.H.T. wrote that his portfolio was currently down about $750,000 (in today’s dollars) after a Spanish Flu-related sell-off...

“I do not want to sell these stocks at the present market,” he wrote – carefully not mentioning McAdoo’s punitive taxes. “Would it be legal for me to sell these stocks and deduct the loss from this year’s income, even though I bought them [again in] the same day?”

The WSJ – which was apparently allowed to give personalized investment advice back then – replied that Yes, it was legal. The unspoken understanding that this was a tremendous way to get out of capital gains taxes set off a flurry of tax-loss selling… a strategy that a 1921 U.S. Senate committee report called “evasion through the medium of wash sales.”

The government hated wash sales – but the American people hated taxes with an even deeper passion...

After years of bucking bonds and dodging the IRS, voters kicked Democratic President Woodrow Wilson (and Secretary McAdoo) out of office in 1920. Tax-slashing Republican Warren G. Harding took over, aided by new Treasury Secretary Andrew Mellon, known as the father of trickle-down economics.

Pragmatic Mellon – a fan of “scientific taxation,” where both rich and poor people paid lower taxes, and no one got off scot-free – drafted the well-received Revenue Act of 1921, which reduced income taxes, broadened exemptions, and got rid of luxury and transportation taxes. It also explicitly prohibited wash sales, to ensure that everyone ponied up their fair share.

Thanks to Mellon’s tax reforms, Americans pocketed enough extra cash to start speculating (wildly) in the stock market. Inevitably, the Roaring ’20s gave way to the Great Depression, and Big Government stepped in once again to raise taxes and distribute handouts – a vicious cycle that is ongoing today.

Interestingly, wash sales are still going on, too...

Mellon’s prohibition (still on the books) is just vague enough for clever fund managers to engineer workarounds. Rather than selling and buying the same stock, they might sell and buy “similar” stocks or exchange traded funds in order to write off a loss on paper. And, while Mellon’s law doesn’t provide the tax deduction if you buy “substantially identical” stocks within 60 days of each other... he didn’t mention anything about day 61.

Tax-loss harvesting is big business for firms like Goldman Sachs and Morgan Stanley, which have whole teams devoted to it. If you look at the tax records of the world’s richest men (like Sam Walton, of the Walmart fortune), you’ll typically see a series of small losses right around the end of each year. In 2018, an astonishing two-thirds of Americans worth over $10 million reported net short-term losses.

Those are all wash sales – you’re seeing smart billionaires fudge their taxes in real-time.

Frequently, you’re also seeing a series of artificially generated sell-offs in stocks that don’t deserve the beating...

Year-end wash selling often sets the stage for a recovery in early January. Once the tax-year deadline passes, the outside selling pressure vanishes. Investors who were sitting on the sidelines to avoid wash-sale violations often move back into these depressed stocks, leading to a "mean reversion" or a bounce in price.

That’s the case for the company heading up our Best Buys this month – a world-class energy business temporarily depressed by outside circumstances, which made it an easy target for tax-loss selling. The January rebound for this firm has already begun, as shares are up more than 20% to start the year.

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