Tax Loss Harvesting -- go for it?

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Topic Author
boglerocks
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Tax Loss Harvesting -- go for it?

Post by boglerocks »

Tough year in the stock market for me. I started with $250K in holdings, realized gains of $160K ($40K of them long-term) and realized losses of $70K and my current holdings are $90K due to unrealized losses. I want to stick with most of my stocks long-term but maybe selling now to harvest the losses and buying back in 31 days is a good idea. Otherwise I have to pay tax this year on my realized gains. I likely won't have any other capital gains this year but I anticipate a lot of long-term gains next year so I'd like to be able to write these losses off against them then. The $3K deduction against regular income is good too. Anything I should consider before going through with it? I'm nowhere near 65 in case it matters.
Sidney
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Re: Tax Loss Harvesting -- go for it?

Post by Sidney »

I always harvest unrealized losses. There normally is no cost and usually an upside. I don't stay out of the position though; I move to a similar fund -- but one that I'd be comfortable holding forever if things bounce back quickly.
I always wanted to be a procrastinator.
livesoft
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Re: Tax Loss Harvesting -- go for it?

Post by livesoft »

I am confused by what you wrote, but I will answer based on my best guess of your situation.

1. Sell all losers in 2014. This is a given. One does this in order to avoid the behavioral finance trap of loss aversion and start each new year only with winners.
2. Don't wait 30 days to reinvest in whatever, just reinvest in passively-managed low-expense-ratio index funds or ETFs.
3. Do not buy nor hold stocks ever. Sell all the losers and buy passively-managed low-expense ratio index funds or ETFs according to your asset allocation plan.
4. What is the total amount of realized losses that you have now? The total amount of unrealized losses that you can realize now?
5. If you are in the 0% LT capital gain tax bracket this year or plan to be next year, let us know.
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Topic Author
boglerocks
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Re: Tax Loss Harvesting -- go for it?

Post by boglerocks »

Sidney wrote:I always harvest unrealized losses. There normally is no cost and usually an upside. I don't stay out of the position though; I move to a similar fund -- but one that I'd be comfortable holding forever if things bounce back quickly.
Good point. I could buy similar stuff without waiting 31 days.
Topic Author
boglerocks
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Re: Tax Loss Harvesting -- go for it?

Post by boglerocks »

livesoft wrote:4. What is the total amount of realized losses that you have now? The total amount of unrealized losses that you can realize now?
5. If you are in the 0% LT capital gain tax bracket this year or plan to be next year, let us know.
My total realized gain/loss in 2014 is a $90K gain. Unrealized gain/loss is around a $260K loss.

How do I get into the 0% LT capital gain tax bracket? :)
fredjohnson
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Re: Tax Loss Harvesting -- go for it?

Post by fredjohnson »

Your plan sounds good to me. Better not to even have to think about "loss harvesting", but crap happens.
Topic Author
boglerocks
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Re: Tax Loss Harvesting -- go for it?

Post by boglerocks »

What about IRA accounts? I have a Traditional, Roth, and SEP. Which of those should I harvest losses from?
livesoft
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Re: Tax Loss Harvesting -- go for it?

Post by livesoft »

None of them since one cannot deduct the net capital loss from an IRA or other tax-advantaged account except in a very special circumstance.

That VSC is when the total loss of all one's IRAs exceeds 2% of one's adjusted gross income and then one can put the loss as an miscellaneous itemized deduction on Form 1040 Schedule A if one sells their entire IRA.
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Topic Author
boglerocks
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Re: Tax Loss Harvesting -- go for it?

Post by boglerocks »

That VSC doesn't seem all that special. :) If my adjusted gross income is $150K, I only need an unrealized loss of $3K in all of my IRAs combined in order to be allowed to liquidate all of them and and write the entire loss off against my regular income if I itemize? Sounds too good to be true.
livesoft
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Re: Tax Loss Harvesting -- go for it?

Post by livesoft »

No, you missed the gist of it. Only losses ABOVE the 2% are deductible. Plus you would not be able to put that money back into your IRA, so you would lose all potential future tax-deferment on the IRA assets. And don't forget that you have to add the withdrawal (basis) of your IRA to your AGI, too.
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Topic Author
boglerocks
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Re: Tax Loss Harvesting -- go for it?

Post by boglerocks »

It looks like I would have an $18K loss if I liquidated all three of my IRA accounts which is about the same amount as the value of my current holdings there. So if I liquidate them, I would be allowed to pull all funds out of my IRAs without penalty, write off $15K against regular income (if 2% of my AGI is $3K), and my AGI would increase by $17K (if $1K was from my Roth IRA)?

So the net effect would be $500 in extra taxes (if I'm in the 25% tax bracket) and the conversion of all IRA assets to non-IRA assets? I would lose potential future tax-deferment but isn't it better to withdraw now and pay only $500 in tax on my entire IRA holdings of $18K?
livesoft
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Re: Tax Loss Harvesting -- go for it?

Post by livesoft »

Are you going to read the IRS publication and rules for all this, or are you going to go by what an anonymous internet poster writes?
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inbox788
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Re: Tax Loss Harvesting -- go for it?

Post by inbox788 »

boglerocks wrote:Tough year in the stock market for me. I started with $250K in holdings, realized gains of $160K ($40K of them long-term) and realized losses of $70K and my current holdings are $90K due to unrealized losses. I want to stick with most of my stocks long-term but maybe selling now to harvest the losses and buying back in 31 days is a good idea. Otherwise I have to pay tax this year on my realized gains. I likely won't have any other capital gains this year but I anticipate a lot of long-term gains next year so I'd like to be able to write these losses off against them then. The $3K deduction against regular income is good too. Anything I should consider before going through with it? I'm nowhere near 65 in case it matters.
What did you invest in that lost $70k? Over what period? It's tough losing that much in a bull market, which we've had in the last 2 years. Even the poorly performing indices, like international ones aren't down very much. Were these individual stocks? Which ones?

FWIW, I don't see any problem with taking the loss now while you can. Though if you're invested in specific stocks and it recovers you'll be kicking yourself, unless you found a similar but not substantially identical substitute.
Topic Author
boglerocks
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Re: Tax Loss Harvesting -- go for it?

Post by boglerocks »

livesoft wrote:Are you going to read the IRS publication and rules for all this, or are you going to go by what an anonymous internet poster writes?
Well I like to kick it off with a little help from my anonymous friends before I check with a pro and then finally take the plunge. No good?

inbox788 wrote:What did you invest in that lost $70k? Over what period? It's tough losing that much in a bull market, which we've had in the last 2 years. Even the poorly performing indices, like international ones aren't down very much. Were these individual stocks? Which ones?
It wasn't easy but with marijuana industry penny stocks I was able to get it done over about 6 months or so. I know, guys. I know.

inbox788 wrote:FWIW, I don't see any problem with taking the loss now while you can. Though if you're invested in specific stocks and it recovers you'll be kicking yourself, unless you found a similar but not substantially identical substitute.
I plan to buy into different pot stocks and hold them for 31 days and then buy back into the "good" ones that I sold once the clock runs out. Go ahead guys, I can take it.

The sad part is this is all true. Luckily other investments have made up for these losses so I don't feel too badly about the whole thing.
Topic Author
boglerocks
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Re: Tax Loss Harvesting -- go for it?

Post by boglerocks »

livesoft wrote:Are you going to read the IRS publication and rules for all this, or are you going to go by what an anonymous internet poster writes?
I brought this up with my tax guy.

I said:
I read that I can actually liquidate and withdraw all of my IRA holdings if doing so would amount to a loss equal to 2% or more of my AGI. Is that true? Seems too good to be true.
He said:
What IRA are you deducting?
If it's your SEP IRA - your statement is not true
If it's your ROTH IRA - your statement is not true
You can only do that if you have made a regular IRA contribution and have NOT deducted that IRA
So which IRS publication is that exactly?
livesoft
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Re: Tax Loss Harvesting -- go for it?

Post by livesoft »

529 for starters which then points to 590. Google found that for me.
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boglerocks
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Re: Tax Loss Harvesting -- go for it?

Post by boglerocks »

livesoft wrote:529 for starters which then points to 590. Google found that for me.
I found this in Publication 590:
Recognizing Losses on Traditional IRA Investments

If you have a loss on your traditional IRA investment, you can recognize (include) the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any.

Your basis is the total amount of the nondeductible contributions in your traditional IRAs.

You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.
I'm stuck on the "only when all the amounts in all your traditional IRA accounts have been distributed to you" part. It doesn't say that the loss gives you permission to withdraw your IRA funds. Am I missing something?
livesoft
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Re: Tax Loss Harvesting -- go for it?

Post by livesoft »

LOL! I mentioned that this would be applicable only as a "very special circumstance". Yes, very special.

I thought you would get hung up on the definition of "basis" mostly. For a typical tradtional IRA, the basis is zero because typically one does not make nondeductible contributions to a traditional IRA.
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boglerocks
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Re: Tax Loss Harvesting -- go for it?

Post by boglerocks »

livesoft wrote:LOL! I mentioned that this would be applicable only as a "very special circumstance". Yes, very special.
You defined the very special circumstance this way:
livesoft wrote:That VSC is when the total loss of all one's IRAs exceeds 2% of one's adjusted gross income and then one can put the loss as an miscellaneous itemized deduction on Form 1040 Schedule A if one sells their entire IRA.
But that is not specified in Publication 590.
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Re: Tax Loss Harvesting -- go for it?

Post by grabiner »

boglerocks wrote:I found this in Publication 590:
Recognizing Losses on Traditional IRA Investments

If you have a loss on your traditional IRA investment, you can recognize (include) the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any.

Your basis is the total amount of the nondeductible contributions in your traditional IRAs.

You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.
I'm stuck on the "only when all the amounts in all your traditional IRA accounts have been distributed to you" part. It doesn't say that the loss gives you permission to withdraw your IRA funds. Am I missing something?
You always have permission to withdraw your IRA funds; you will owe tax and possibly a 10% penalty on any money not already taxed. However, in the situation described here, there is no penalty because there are no taxable gains. Here is the scenario:

At the start of 2014, you have no IRA.
You make a $5500 nondeductible contribution to an IRA in 2014.
You make a $5500 nondeductible contribution to an IRA in 2015.
Late in 2015, the market has dropped, and your IRA is worth only $9000.
You can withdraw your entire IRA, and take the $2000 loss as a miscellaneous itemized deduction. (However, if you do this, you lose the opportunity for the $9000 to grow tax-deferred in the future.)
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