Help with capital gains and losses (Tax Loss Harvesting)

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Colin19
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Joined: Fri Sep 25, 2009 9:52 am

Help with capital gains and losses (Tax Loss Harvesting)

Post by Colin19 »

I'm having trouble understanding Tax Loss Harvesting and capital gains/losses.

ex 1. Say its back in 2008 I invested 10,000, by December I only had 4,000 left. If I sell now I will have 6,000 in capital losses (3,000 that I can deduct from my taxes and 3,000 that will carry forward). I think this is right. Now say I didn't sell in December but now sell in January 2009 when I still have 4,000 am I SOL and won't get any capital loss credit since its a new year? This is what i'm confused about.

ex 2. Say I invested 10,000 in 2009 and by the start 2012 I now have 20,000. If by the end of 2012 I only have 10,000 left, if I sell can I claim this as a capital loss or is this not possible since I haven't gone under my initial deposit? If this is true and I can't sell it as a capital loss it is a good idea to cash out of your index funds or investments every so many years so that if you do have a huge downer year like 2008 you can sell your investment as a capital loss and at least get tax credit?

Thanks for taking the time to help answer these questions and sorry if there was a post explaining this since I tried to look through the wiki page and through old post.
kaneohe
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Post by kaneohe »

ex 1: if you sold in Dec 2008, you would have 6K loss for tax yr 2008 which you use when you prepare taxes in early 2009. If you sold in Jan 2009, you would have 6K loss for tax yr 2009 when you prepare return in early 2010.

ex 2: gains are sales price less basis (cost) and doesn't care about the intermediate points . So if you bought at 10K and sold at 10K, no loss.
If you're saying you should have sold at 20K so you could take a loss when it dropped back to 10K, you also need to remember that when you sell at 20K, you will have a 10K gain from purchase price. That washes out the 10K loss you have later for basically net of 0........what have you gained over doing nothing?
InvestingMom
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Post by InvestingMom »

ex 1. Say its back in 2008 I invested 10,000, by December I only had 4,000 left. If I sell now I will have 6,000 in capital losses (3,000 that I can deduct from my taxes and 3,000 that will carry forward). I think this is right. Now say I didn't sell in December but now sell in January 2009 when I still have 4,000 am I SOL and won't get any capital loss credit since its a new year? This is what i'm confused about.
No you are not S. out of luck. You still have a capital loss of 6K. If you have no other capital gains or losses, you will be able to deduct 3K in 2009 and carryforward 3K to 2010. However the rules are a bit more complex, especially if you have other capital gains and losses. You should definitely read up more on this topic (capital gains and losses)before you jump in.
ex 2. Say I invested 10,000 in 2009 and by the start 2012 I now have 20,000. If by the end of 2012 I only have 10,000 left, if I sell can I claim this as a capital loss or is this not possible since I haven't gone under my initial deposit?
No, you have no loss in this example.
If this is true and I can't sell it as a capital loss it is a good idea to cash out of your index funds or investments every so many years so that if you do have a huge downer year like 2008 you can sell your investment as a capital loss and at least get tax credit?
It is hard to understand this question exactly because the example you gave indicates you had an intermediate gain? However, if you are just asking if you should sell when you have losses, then yes that can be a good strategy. The rules are a bit complex for tax loss harvesting so becareful. Check out this post:
http://www.bogleheads.org/forum/viewtop ... est+mother
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BruceM
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Re: Help with capital gains and losses (Tax Loss Harvesting)

Post by BruceM »

Colin19 wrote:I'm having trouble understanding Tax Loss Harvesting and capital gains/losses.

ex 1. Say its back in 2008 I invested 10,000, by December I only had 4,000 left. If I sell now I will have 6,000 in capital losses (3,000 that I can deduct from my taxes and 3,000 that will carry forward). I think this is right. Now say I didn't sell in December but now sell in January 2009 when I still have 4,000 am I SOL and won't get any capital loss credit since its a new year? This is what i'm confused about.
Yes. Assuming this is a taxable account, capital gains or losses only 'count' in the year they are realized...that is, in the year you've converted the investment into cash.
Colin19 wrote:ex 2. Say I invested 10,000 in 2009 and by the start 2012 I now have 20,000. If by the end of 2012 I only have 10,000 left, if I sell can I claim this as a capital loss or is this not possible since I haven't gone under my initial deposit? If this is true and I can't sell it as a capital loss it is a good idea to cash out of your index funds or investments every so many years so that if you do have a huge downer year like 2008 you can sell your investment as a capital loss and at least get tax credit?

Thanks for taking the time to help answer these questions and sorry if there was a post explaining this since I tried to look through the wiki page and through old post.
Your basis in the investment = the amount you initially paid plus any reinvestments since you held it plus any transaction costs. If you've held the investment(s) for at least one year and then sell all or part of them, you'll have a long term capital gain. If you sell for less than your basis but have held for at least a year, you'll have a long term capital loss. But if you held the investment less than one year upon sale, it will be a short term capital gain or a short term capital loss.

If a loss, whether short or long term, you must then use $3,000 of it against ordinary income as a form of negative income (not a tax credit). If your loss is >$3,000, then the unused loss will be carried forward to future years 1040 returns until used up or used as an offset to future capital gains.

BruceM
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Taylor Larimore
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Capturing Tax-loss benefits

Post by Taylor Larimore »

Hi Colin:

Welcome to the Bogleheads forum!

I will give you a brief answer:
ex 1. Say its back in 2008 I invested 10,000, by December I only had 4,000 left. If I sell now I will have 6,000 in capital losses (3,000 that I can deduct from my taxes and 3,000 that will carry forward). I think this is right. Now say I didn't sell in December but now sell in January 2009 when I still have 4,000 am I SOL and won't get any capital loss credit since its a new year? This is what i'm confused about.
The answer is "yes, you won't get any new capital loss credit in 2009 if you did not sell losing securities in 2009. Of course, you might have carry-forward losses from earlier years.
ex 2. Say I invested 10,000 in 2009 and by the start 2012 I now have 20,000. If by the end of 2012 I only have 10,000 left, if I sell can I claim this as a capital loss or is this not possible since I haven't gone under my initial deposit?
"No" you cannot claim a loss because you haven't gone under your initial deposit.
If this is true and I can't sell it as a capital loss it is a good idea to cash out of your index funds or investments every so many years so that if you do have a huge downer year like 2008 you can sell your investment as a capital loss and at least get tax credit?
"yes." It is important to sell losing taxable funds before year end to capture that year's tax-loss benefit. Afterwards, wait 31 days before buying back the fund.
Last edited by Taylor Larimore on Fri Sep 25, 2009 11:06 am, edited 1 time in total.
"Simplicity is the master key to financial success." -- Jack Bogle
Topic Author
Colin19
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Joined: Fri Sep 25, 2009 9:52 am

Post by Colin19 »

kaneohe wrote: ex 2: gains are sales price less basis (cost) and doesn't care about the intermediate points . So if you bought at 10K and sold at 10K, no loss.
If you're saying you should have sold at 20K so you could take a loss when it dropped back to 10K, you also need to remember that when you sell at 20K, you will have a 10K gain from purchase price. That washes out the 10K loss you have later for basically net of 0........what have you gained over doing nothing?
This makes sense but from what I think i understand is that if you keep your investment for over a year and a day your gains are now all capital gains and are taxed at 15%. Now say your federal tax rate is 33% and you would have sold your index fund or investment after you secured those long term capital gains. Now if the market goes down where your investment drops say 10k like ex.2 aren't you saving more money this way since you can save up to 3k a year at a 33% rate? Or am I still missing something?
kaneohe
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Post by kaneohe »

What you are proposing could work.......since LTCG are taxed at 15%
(or even 0% for now if you qualify) and if you could take the losses against your ordinary income. However, the capital losses have to be taken first against capital gains......if you had gains that covered the losses, you would only be gaining at the capital gains rate. If your gains were small or zero so that the losses could be applied against ordinary income at the higher rates, then there could be a net gain as you suggest.

edit: try reading here and the many links within

http://www.fairmark.com/capgain/
Topic Author
Colin19
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Joined: Fri Sep 25, 2009 9:52 am

Post by Colin19 »

Thanks to everyone the links and responses were just what I needed.
InvestingMom
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Post by InvestingMom »

Colin19 wrote:
kaneohe wrote: ex 2: gains are sales price less basis (cost) and doesn't care about the intermediate points . So if you bought at 10K and sold at 10K, no loss.
If you're saying you should have sold at 20K so you could take a loss when it dropped back to 10K, you also need to remember that when you sell at 20K, you will have a 10K gain from purchase price. That washes out the 10K loss you have later for basically net of 0........what have you gained over doing nothing?
This makes sense but from what I think i understand is that if you keep your investment for over a year and a day your gains are now all capital gains and are taxed at 15%. Now say your federal tax rate is 33% and you would have sold your index fund or investment after you secured those long term capital gains. Now if the market goes down where your investment drops say 10k like ex.2 aren't you saving more money this way since you can save up to 3k a year at a 33% rate? Or am I still missing something?
Back up the bus gus...think about it. If the investment had gone up to 20K, you sold it after holding it a year for a 10K loss, then you bought it 31 days later for 20K (or bought a similar investment immediately) and sold it within a year for 10K...but in a different taxable year, had NO other gains or losses, (and were in the 15% capital gains bracket) then you would pay 1500 in taxes (15% on 10K) in year one, pay less taxes of about 1K in year 2, and then have to wait till year 3 to get any benefit from this move.

How complicated can you get.....the first premise is that you have to hope that your investment goes down!!!!
Then you have to make sure the gain is long term and the loss is short term...both realized in separate years. You have to think about the time value of money. And you have to spend a lot of time on all of this (including chosing another similar investment or making sure you buy back in 31 days, making sure you sell based on ST and LT considerations, etc.)

IMHO, Not worth it!

Edited to say IMHO ;-)
kaneohe
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Post by kaneohe »

IM------agree w/ everything you said re: complexity/time value etc.
minor point: doesn't need to wait 31 days since first sale is a gain;
also capital loss doesn't need to be short-term to be applied against
ordinary income (but does need to be applied against CG first).
InvestingMom
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Joined: Mon Aug 20, 2007 2:45 pm

Post by InvestingMom »

kaneohe wrote:IM------agree w/ everything you said re: complexity/time value etc.
minor point: doesn't need to wait 31 days since first sale is a gain;
also capital loss doesn't need to be short-term to be applied against
ordinary income (but does need to be applied against CG first).
You are right. Sounds like you got it.
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