ajka wrote:May be very dumb question, why shouldn't I sell the losing position this year and the winning position next year? I'm sure there is a reason but just don't know why.
My reasoning (in the absence of any specific information on whether a single-year sale will put a portion in the next tax bracket, or whether you are in a credit phaseout that makes your 2012 effective bracket quite high), is that using losses to offset ordinary income is more valuable in future years and recognizing gains is better in 2012, because both ordinary income rates and the long term capital gains rate are going up next year. So recognizing gains this week seizes the last chance at low LTCG rates, and recognizing losses next week allows the use of $3,000 of losses per year against higher ordinary income tax rates in future years. Example:
$6,000 of losses and $6,000 of LTCG (portion of gain that will be taxed as ordinary income is actually irrelevant to the choice)
(1) Losses in 2012 offset $3,000 of 2012 ordinary income taxed at 25% and $3,000 of 2013 LTCG taxed at 20%. $3,000 of remaining gains in 2013 are taxed at 20%. Net tax effect = (0.20*$6,000)-(0.25*$3,000)-(0.20*$3,000) = $1,200 - $750 - $600 = -$150
(2) Losses in 2013 offset $3,000 of 2013 and 2014 ordinary income taxed at 28%. Gains in 2012 are taxed at 15%. Net tax effect = (0.15*$6,000)-(0.28*$6,000) = $900 - $1,680 = -$780