Cumulative Capital Losses Harvesting?

[ColoMountains]

Hello all, and to all a BIG thanks for all of your help.
My wife and I have been married for 18 years.
During that time we've accrued capital losses due to the crash of the energy sector, the year 2021-22 debacle and other things like $45K on a local bank's stock that went totally under. We've been taking the $3K deduction (filing jointly) since I have a memory.
Question is: WHERE or HOW do I calculate our total historical "pending" capital losses to be able to get rid of them AT ONCE during 2023?
We've already filed our 2022 taxes.
Thanks in advance.

[retired@50]

Hello all, and to all a BIG thanks for all of your help.
My wife and I have been married for 18 years.
During that time we've accrued capital losses due to the crash of the energy sector, the year 2021-22 debacle and other things like $45K on a local bank's stock that went totally under. We've been taking the $3K deduction (filing jointly) since I have a memory.
Question is: WHERE or HOW do I calculate our total historical "pending" capital losses to be able to get rid of them AT ONCE during 2023?
We've already filed our 2022 taxes.
Thanks in advance.

Look over your 2022 tax return for a Capital Loss Carry-forward Worksheet. The remaining short term and long term capital losses should be revealed.

To get rid of the remaining capital losses, you can either continue to deduct them at the pace of $3k per year, or you can sell something that shows a similar sized capital gain. The gain would be shown on your 2023 return and would be netted against your old capital losses.

Regards,

[ColoMountains]

So... as I (think I) understand by your reply:
The TOTAL AMOUNT of our HISTORICAL capital losses are already determined and passed along from year to year in our tax returns?
Because I asked my accountant the same question and she said:
"It is a calculation based on investment's statements and property purchases and sales. To be 100% accurate, you would need to go through the actual docs. They should tie to the schedule's Ds on the years' tax returns."
Is she stating basically the same thing you said or just covering her **tt for the years she did not do our taxes?
BTW we've never done our taxes ourselves, always used a reputed CPA.
I just don't want to mess up anything, if you get me.
Thank you for your answer.

[retired@50]

So... as I (think I) understand by your reply:
The TOTAL AMOUNT of our HISTORICAL capital losses are already determined and passed along from year to year in our tax returns? <- They should be.

Because I asked my accountant the same question and she said:
"It is a calculation based on investment's statements and property purchases and sales. To be 100% accurate, you would need to go through the actual docs. They should tie to the schedule's Ds on the years' tax returns." <- Yes, Schedule D is certainly part of it.

Is she stating basically the same thing you said or just covering her **tt for the years she did not do our taxes?
BTW we've never done our taxes ourselves, always used a reputed CPA.
I just don't want to mess up anything, if you get me.
Thank you for your answer.

See answers above in blue.

The worksheet I referred to isn't an official IRS form or schedule, but is often included when preparing income taxes using tax software. I use Turbo Tax and the worksheet is produced each year. If you don't have a worksheet in your tax packet, then refer to lines 6, 14, and 16 on your Schedule D.

Regards,

[ColoMountains]

Ok, I found it.
I've been going through it.
I must confess to my chagrin that I'm a total ignorant in these matters, as you'd probably realized already.
I'm meeting with my CPA and clarifying on, but it seems like we've already used all the losses.
We'll see.
Thanks again.

[retired@50]

Ok, I found it.
I've been going through it.
I must confess to my chagrin that I'm a total ignorant in these matters, as you'd probably realized already.
I'm meeting with my CPA and clarifying on, but it seems like we've already used all the losses.
We'll see.
Thanks again.

You might need to review more than one years' taxes.

You could look at the past 3 or 4 years to get a better sense of what's been going on.

Regards,

[FactualFran]

Look at your copy of Schedule D of the income tax return for 2022. If the amount on line 16 is a loss that is more than a loss of $3,000, then there is a loss carryover to 2023. The carryover is the loss on line 16 as a positive value minus $3,000. $3,000 is the maximum net capital loss used in the calculation of the adjusted gross income on Form 1040.

[ColoMountains]

Thank you.

[dratkinson]

To be clear, you want to generate capital gains (ST/LT CG) ...to offset total carryover capital losses (1099B: ST/LT CL*). Converting a traditional account to a Roth account does not generate a CG, it generates ordinary income ...which does not net against carryover CLs.

* A carryover ST/LT CL offsetting a voluntarily harvested ST CGs gives a bigger tax benefit than it does when offsetting a voluntarily harvested LT CG. Why? Because LT CGs already receive a tax benefit, whereas ST CGs do not. So selling to generate LT CGs, to offset carryover CLs (ST/LT), wastes some of the carryover loss tax benefit, which is better used to offset ordinary income over more years.


Change in carryover loss each year. If you look at 1099DIV box 2a, you see LTCGs* reported from internal fund operations. These LTCGs flow to Sch D line 13 and are netted against any carryover CLs (ST/LT). So, - 1099DIV CGs, -/+ gains/losses from 1099B selling, - $3K of ordinary income should be the amount by which our total carryover loss is reduced/increased each year.

* Any STCG from internal fund operations seems to be reported in box 1a (no other place to report it) and taxed as ordinary income---tax s/w can't break it out to offset separate from ordinary income.


Edit. Clarity.

[placeholder]

Why do you want to do this?

[ColoMountains]

Thanks to all for your replies.
I'm doing this to reset our losses acquired during the years.
Specially the ones accumulated before our marriage.
My wife is not well and the lawyer told us that some of those losses shouldn't "expire with her", if you must know.
Thanks again.

[dratkinson]

Sorry to hear of your troubles.


I could be misunderstanding your situation, so others please correct my thinking.

If you use your carryover losses to reset your cost basis on existing investments (assumed to be stock funds):
--You'll keep the same investments, and pay zero tax now, to lower your cost basis on those same investments.
--However, if you must later sell the same investments for living expenses, you'll pay more in tax because of the lower cost basis.

Bottom line. You pay zero tax today, to pay more in tax later, if you must later sell. And since the fed tax rate for a surviving spouse is higher ...maybe much more in tax. So I don't see how your lawyer's advice---"don't let losses expire"---helps you, if you rebuy the same investments at a lower cost basis.


Idea. A better use for the carryover losses might be to sell investments, and put the proceeds into cash equivalents: savings, CDs,.... Why? You've paid tax---netted against losses---to gather a cash surplus, to pay for future living expenses. So you delay the time when you'd need to sell more investments for same. Future taxes: You'd only owe tax on any interest income generated by the cash; in which case, it would be nice if that future interest income were tax-exempt.*

* I'd be tempted to sell---net against capital losses---and use the proceeds to buy a municipal bond fund. Why? Bonds fluctuate less in value than stocks, so I'd expect to pay less in tax if I later needed to sell; but until then I'd receive dividends that are fed tax exempt. (Since the fed tax bite is higher than the state tax bite, it's the fed tax bite that I'd want to reduce, first. And depending upon your state of residency and tax brackets, could also investigate single-state muni funds.)

Bond fund total return. Since dividends are the major component of bond fund total return (dividends + NAV appreciation---almost nonexistent for bond funds), and longer duration bonds pay more dividends than shorter duration bonds, my preference is for Vanguard's long-term municipal bond fund (VWLTX). (I'm a Vanguard client, and VWLTX does not have an ETF share class. Non-Vanguard clients, could consider VTEB.)


The current fed action to curb inflation is whipsawing interest rates, and so too bond prices; but making TIPS* yields look good (temporarily?). But inflation does seem to be inching downward. Meaning, fed should lower interest rates eventually---maybe over many years. (* TIPS are fed taxable, state-tax exempt, hence my preference for the muni fed tax benefit to offset the larger fed tax bite.)
See: https://tradingeconomics.com/united-sta ... lation-cpi

If inflation is reduced sufficiently (to 1-2% range) and fed lowers interest rates, then any bonds bought today, should see a slight increase in NAV---still less volatile than stocks.


I've read that others prefer to buy a SPIA (single-premium immediate annuity) to pay for future living expenses. But I know nothing about them nor how their proceeds are taxed---others must provide that insight.


Since our heirs/beneficiaries get a stepped up cost basis on any bequest, we don't need to worry about them.


Bottom line. Using your carryover losses:
--To gather cash surplus to delay the time when you need to tap investment further, might be a good idea---only owe tax on interest earned.
--To buy muni fund---expected lower NAV fluctuation/tax than stocks when later sold---for current tax exempt dividends, might be better idea. Would need to compare muni TEY (taxable-equivalent yield) to taxable alternatives (bonds, CDs,...), and wag when economy/interest rates might return to more normal times when TIPS look less attractive.
--To lower stock cost basis seems to be sub-optima---expected higher future tax if forced to sell---and maybe worse than allowing losses to expire.

I don't know how an SPIA would fit into above thinking.

I don't know how RMDs on surviving spouse would fit into above thinking since we don't know the particulars of your situation; but they would delay the need to sell lower cost-basis taxable investments for living expenses.



Wishing the best for you and yours.

[retired@50]

Sorry to hear of your troubles.


I could be misunderstanding your situation, so others please correct my thinking.

If you use your carryover losses to reset your cost basis on existing investments (assumed to be stock funds):
--You'll keep the same investments, and pay zero tax now, to lower your cost basis on those same investments.
--However, if you must later sell the same investments for living expenses, you'll pay more in tax because of the lower cost basis.

Bottom line. You pay zero tax today, to pay more in tax later, if you must later sell. And since the fed tax rate for a surviving spouse is higher ...maybe much more in tax. So I don't see how your lawyer's advice---"don't let losses expire"---helps you, if you rebuy the same investments at a lower cost basis.

I think the OP will be raising his cost basis by selling a fund with a gain.
Then, at tax time, he'll pay no tax because of the existing carryover losses, which will get used up.

More details here: https://www.bogleheads.org/wiki/Tax_gain_harvesting

Regards,

[Hyperchicken]

Schedule D:

Line 6 Short-term capital loss carryover. Enter the amount, if any, from line 8 of your Capital Loss Carryover Worksheet in the instructions
Line 14 Long-term capital loss carryover. Enter the amount, if any, from line 13 of your Capital Loss Carryover Worksheet in the instructions

You only need to look at your most recent (2022) tax return, as long as the carry-over has been correctly calculated in all the past years.

You only need to look at earlier historic data if you want to verify that you have filed your past tax returns correctly.

[Artsdoctor]

I'm sorry you're going through this difficult period. You mentioned that you'll be meeting with your accountant so rather than guess on advice, try making a list of questions to ask your accountant. A few basic things you should know.

1. Carryover losses are tabulated on Schedule D. There's a running tally, year after year. If you like, you can take your past years' Schedule D and follow the trail of losses to get an idea of how they're tabulated. If your current accountant is new, take those prior returns with you. Otherwise, your accountant will be able to explain your tally to you.

2. When a spouse passes away, the cost basis resets on the date of death. If you're in a community property state, everything resets; if you're not (are you in Colorado?), then half the assets get reset.

3. When a spouse passes away, the carryover losses may pass as well. However, I don't know how that works if you're NOT in a community property state; ask your accountant if all of the carryover losses go away or only half.

4. If you're not in a community property state, then it may be worthwhile to sell some of your assets with capital gains now to reset the cost basis but ask your accountant how that dovetails with those carryover losses you might have.

[dratkinson]

...

I think the OP will be raising his cost basis by selling a fund with a gain.
Then, at tax time, he'll pay no tax because of the existing carryover losses, which will get used up.

More details here: https://www.bogleheads.org/wiki/Tax_gain_harvesting

Regards,

You are correct; I completely forgot OP was tax gain harvesting. Resetting to a *higher* cost basis does make sense. Sorry for the confusion.

(If he had been tax-loss harvesting, as I wrongly assumed, the carryover losses would have increased, not decreases ...so I should have caught my mistake there ...but didn't. So I was wrong at least twice. Thanks for catching my mistake.)