tax loss harvesting and dividends/capital gains

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

tax loss harvesting and dividends/capital gains

Post by trepid_investor »

I dipped my feet into the pool of tax loss harvesting late last year and am now trying to get my head around tax implications. I'd already been aware of the rules around wash sales (and avoiding them), but I belatedly (i.e., just now) realized that I also have to watch out for dividends and/or capital gains if I've owned the shares for 60 days or less. Here's my situation (with some rounded numbers):
  • Oct 8: purchased 1000 shares of VSMGX (Vanguard LifeStrategy Moderate Growth Index Fund)
  • Nov 6: purchased 430 more shares
  • Nov 12: purchased 130 more shares
  • Dec 16: purchased 1200 more shares
  • Dec 31: sold all shares of VSMGX
I harvested around $6000 in tax losses from this sale. I haven't bought any shares of VSMGX since then. I sold all shares, not just some, so I think I'm clear of the wash sale rule. BUT... as I'm getting my act together heading into tax season, I see that it wasn't so simple (of course). :-)

On my 1099, I see the following (rounded) listed for Dec 31:
  • Nonqualified dividend: $1000
  • Qualified dividend: $500
  • ST capital gain: $95
  • LT capital gain: $3700
So... I'd like to understand what to do with these. The wiki says:
If you hold shares for fewer than 61 days and receive qualified dividends from those shares, you cannot take them as qualified dividends, even though the fund company may state that they are qualified. Receiving dividends that are not qualified may outweigh the benefit of tax loss harvesting.
So... the shares I purchased on Oct 8 were held for at least 61 days, but not the ones purchased in Nov or Dec. How do I figure out how much, if any, of the dividends need to be reclassified as unqualified dividends? Or is it possible that, my rounding notwithstanding, Vanguard actually correctly classified $500 as qualified dividends (from my Oct 8 shares) and the rest (from my shares purchased in Nov/Dec) as unqualified?

Also on the wiki, I find:
If you sell shares of a mutual fund at a loss, and you have held those shares for 6 months or less, special rules may alter the loss you claim. ... Second, if you held those shares while the fund distributed (long term) capital gains, you have to treat this loss as a long term loss up to the dollar amount of the distribution those shares produced.
So I think I need to treat the $3500 LT capital gain that was distributed on 12/31 as a short-term gain instead. Is that correct?

Thanks in advance!
User avatar
sycamore
Posts: 7691
Joined: Tue May 08, 2018 12:06 pm

Re: tax loss harvesting and dividends/capital gains

Post by sycamore »

Welcome to the forum,
trepid_investor wrote: Mon Feb 03, 2025 2:26 pm Or is it possible that, my rounding notwithstanding, Vanguard actually correctly classified $500 as qualified dividends (from my Oct 8 shares) and the rest (from my shares purchased in Nov/Dec) as unqualified?
No, that didn't happen.

How do we know? Look at Vanguard QDI info here: https://advisors.vanguard.com/tax-cente ... end-income, and enter "VSGMX". Your funds dividends were only 32.29% QDI.
$1000 non-qualified and $500 qualified is 33.33% which jibes with your round numbers.

I'll soon try to answer your other questions...
User avatar
sycamore
Posts: 7691
Joined: Tue May 08, 2018 12:06 pm

Re: tax loss harvesting and dividends/capital gains

Post by sycamore »

trepid_investor wrote: Mon Feb 03, 2025 2:26 pm So... the shares I purchased on Oct 8 were held for at least 61 days, but not the ones purchased in Nov or Dec. How do I figure out how much, if any, of the dividends need to be reclassified as unqualified dividends?
You prorate the reported QD by number of your shares that actually are eligible for qualified dividends.
In your case, it's 1000 out of 2760 total.

So $500 * 1000 / 2760 = $181.16 you report as qualified and
(1000 + 500 - 181.156) = $1318.84 you report as non-qualified

Hope someone checks my math! :)
livesoft
Posts: 88889
Joined: Thu Mar 01, 2007 7:00 pm

Re: tax loss harvesting and dividends/capital gains

Post by livesoft »

Some of this was covered in an example back in 2015-2016:
viewtopic.php?p=2813166#p2813166
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

Re: tax loss harvesting and dividends/capital gains

Post by trepid_investor »

sycamore wrote: Mon Feb 03, 2025 4:22 pm You prorate the reported QD by number of your shares that actually are eligible for qualified dividends.
In your case, it's 1000 out of 2760 total.

So $500 * 1000 / 2760 = $181.16 you report as qualified and
(1000 + 500 - 181.156) = $1318.84 you report as non-qualified

Hope someone checks my math! :)
Thanks, that's so helpful! I had wondered if dividend amounts depend on how long one holds the shares as well; I guess that's factored into whether it's qualified or non-qualified, but the amount is the same regardless, huh?

Now... what about the reported long-term capital gains? Are those treated as short-term capital gains like I concluded?
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

Re: tax loss harvesting and dividends/capital gains

Post by trepid_investor »

livesoft wrote: Mon Feb 03, 2025 4:42 pm Some of this was covered in an example back in 2015-2016:
viewtopic.php?p=2813166#p2813166
For a moment, I wondered how in the world you had remembered a random related post from ten years ago. Then I saw its author. :-) Thanks!
bongo
Posts: 431
Joined: Wed Oct 25, 2023 11:35 am

Re: tax loss harvesting and dividends/capital gains

Post by bongo »

trepid_investor wrote: Mon Feb 03, 2025 2:26 pm I dipped my feet into the pool of tax loss harvesting late last year...
I harvested around $6000 in tax losses from this sale...
On my 1099, I see the following (rounded) listed for Dec 31:
  • Nonqualified dividend: $1000
  • Qualified dividend: $500
  • ST capital gain: $95
  • LT capital gain: $3700
You're not gaining as much TLH as you think, ie 6k in realized losses, but $5295 in various distributions. You coulda just sold on Dec 27th before the distributions and ended up with roughly the same thing.
trepid_investor wrote: Mon Feb 03, 2025 2:26 pm So I think I need to treat the $3500 LT capital gain that was distributed on 12/31 as a short-term gain instead. Is that correct?
The capgain distribution is still long term, but the sale for a loss will have be reported in two parts, one long term up to the amount of the capgain distribution and one short term for the rest of the loss.
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

Re: tax loss harvesting and dividends/capital gains

Post by trepid_investor »

bongo wrote: Tue Feb 04, 2025 12:41 am You're not gaining as much TLH as you think, ie 6k in realized losses, but $5295 in various distributions. You coulda just sold on Dec 27th before the distributions and ended up with roughly the same thing
Yeah, I have realized that since, but this was my first time really trying to do this, and I had not actually anticipated the dividend and capital gains being paid out on the same day. When I finally decided to sell, I did not take into account the ex-dividend date, so I didn't realize these would all be paid out and the price would take that into account.

I think what you're saying is that the way these distributions work, the distributions are baked into the price drop. So if I had sold before the distributions, then the reported loss would have been that much less. Do I have that right?
bongo wrote: Tue Feb 04, 2025 12:41 am The capgain distribution is still long term, but the sale for a loss will have be reported in two parts, one long term up to the amount of the capgain distribution and one short term for the rest of the loss.
Oh, okay, I think I just flipped it upside down in my wording. So the capital loss needs to be partly characterized as long-term because some of the capital gain distributions are long-term and I didn't hold the shares for longer than 6 months. Right?
User avatar
sycamore
Posts: 7691
Joined: Tue May 08, 2018 12:06 pm

Re: tax loss harvesting and dividends/capital gains

Post by sycamore »

Do you use tax software or use a tax preparer/accountant? It would be interesting to see how they handle your situation.

You'll need to give the software or preparer some hints.

In TurboTax, after entering the values from the 1099-DIV as-is, you're prompted:

Image

Check the box "Some qualified dividends ..." and click Continue, it shows:

Image
toddthebod
Posts: 8651
Joined: Wed May 18, 2022 12:42 pm

Re: tax loss harvesting and dividends/capital gains

Post by toddthebod »

trepid_investor wrote: Tue Feb 04, 2025 9:03 am Oh, okay, I think I just flipped it upside down in my wording. So the capital loss needs to be partly characterized as long-term because some of the capital gain distributions are long-term and I didn't hold the shares for longer than 6 months. Right?
All losses are short term.

While you do recharacterize qualified dividends as non-qualified based on your holding period for the fund, you do not recharacterize capital gains distributions.

I'm not sure what bongo was trying to say. Assuming you don't have any other capital gains, you will zero out all the long term distributions from this fund and apply the remaining $2,300 loss against income.
Last edited by toddthebod on Tue Feb 04, 2025 6:26 pm, edited 1 time in total.
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

Re: tax loss harvesting and dividends/capital gains

Post by trepid_investor »

sycamore wrote: Tue Feb 04, 2025 3:44 pm Do you use tax software or use a tax preparer/accountant? It would be interesting to see how they handle your situation.

You'll need to give the software or preparer some hints.
I do use tax software to prepare my income taxes myself. I'll keep an eye out for that checkbox this year.
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

Re: tax loss harvesting and dividends/capital gains

Post by trepid_investor »

toddthebod wrote: Tue Feb 04, 2025 3:50 pm
trepid_investor wrote: Tue Feb 04, 2025 9:03 am Oh, okay, I think I just flipped it upside down in my wording. So the capital loss needs to be partly characterized as long-term because some of the capital gain distributions are long-term and I didn't hold the shares for longer than 6 months. Right?
All losses are short term.

While you do recharacterize qualified dividends as non-qualified based on your holding period for the fund, you do not recharacterize capital gains distributions.

I'm not sure what bongo was trying to say. Assuming you don't have any other capital gains, you will zero out all the distributions from this fund and apply the remaining $2,205 loss against income.
Maybe I misunderstand what you mean when you say "all losses are short term." I think my capital gains and dividend distributions will cancel out $5295 of my losses from the sale, and the remainder will count as short-term loss. But of that $5295, doesn't $3700 count as long-term losses because that's the amount of LT cap gains distributions?
toddthebod
Posts: 8651
Joined: Wed May 18, 2022 12:42 pm

Re: tax loss harvesting and dividends/capital gains

Post by toddthebod »

trepid_investor wrote: Tue Feb 04, 2025 4:28 pm
toddthebod wrote: Tue Feb 04, 2025 3:50 pm

All losses are short term.

While you do recharacterize qualified dividends as non-qualified based on your holding period for the fund, you do not recharacterize capital gains distributions.

I'm not sure what bongo was trying to say. Assuming you don't have any other capital gains, you will zero out all the distributions from this fund and apply the remaining $2,205 loss against income.
Maybe I misunderstand what you mean when you say "all losses are short term." I think my capital gains and dividend distributions will cancel out $5295 of my losses from the sale, and the remainder will count as short-term loss. But of that $5295, doesn't $3700 count as long-term losses because that's the amount of LT cap gains distributions?
Capital losses do not cancel out dividends.

Short term capital losses are applied against short term gains first, then applied against long term gains, then up to $3,000 against income. I don't find it helpful to say they "count as long-term losses." On Schedule D, you will have a short term loss in part I, a long term gain in part II, and you'll add them together in part III.

I made a mistake earlier, your $95 of short term capital gains distributions are treated as non-qualified dividends, not capital gains.
bongo
Posts: 431
Joined: Wed Oct 25, 2023 11:35 am

Re: tax loss harvesting and dividends/capital gains

Post by bongo »

toddthebod wrote: Tue Feb 04, 2025 6:25 pm
trepid_investor wrote: Tue Feb 04, 2025 4:28 pm
Maybe I misunderstand what you mean when you say "all losses are short term." I think my capital gains and dividend distributions will cancel out $5295 of my losses from the sale, and the remainder will count as short-term loss. But of that $5295, doesn't $3700 count as long-term losses because that's the amount of LT cap gains distributions?
Capital losses do not cancel out dividends.

Short term capital losses are applied against short term gains first, then applied against long term gains, then up to $3,000 against income. I don't find it helpful to say they "count as long-term losses." On Schedule D, you will have a short term loss in part I, a long term gain in part II, and you'll add them together in part III.

I made a mistake earlier, your $95 of short term capital gains distributions are treated as non-qualified dividends, not capital gains.
We're talking about the 6-month holding rule for capgain distributions when selling for a loss, which was quoted from the Wiki in the OP. A more detailed explanation can be found here https://fairmark.com/investment-taxatio ... hs-or-less

It basically closes a loophole which would allow someone to convert their short term gains into long term gains by buying something else for 1 day just to get a large capgain distribution.

I've always been surprised that this forum really harps on the 31 day wash sale rule, kind of mentions the 61 day qdiv rule, and barely acknowledges this 6 month rule. Maybe that's why it wasn't on OP's radar when they did the TLH the day after the distributions.
toddthebod
Posts: 8651
Joined: Wed May 18, 2022 12:42 pm

Re: tax loss harvesting and dividends/capital gains

Post by toddthebod »

bongo wrote: Tue Feb 04, 2025 7:12 pm
toddthebod wrote: Tue Feb 04, 2025 6:25 pm

Capital losses do not cancel out dividends.

Short term capital losses are applied against short term gains first, then applied against long term gains, then up to $3,000 against income. I don't find it helpful to say they "count as long-term losses." On Schedule D, you will have a short term loss in part I, a long term gain in part II, and you'll add them together in part III.

I made a mistake earlier, your $95 of short term capital gains distributions are treated as non-qualified dividends, not capital gains.
We're talking about the 6-month holding rule for capgain distributions when selling for a loss, which was quoted from the Wiki in the OP. A more detailed explanation can be found here https://fairmark.com/investment-taxatio ... hs-or-less

It basically closes a loophole which would allow someone to convert their short term gains into long term gains by buying something else for 1 day just to get a large capgain distribution.

I've always been surprised that this forum really harps on the 31 day wash sale rule, kind of mentions the 61 day qdiv rule, and barely acknowledges this 6 month rule. Maybe that's why it wasn't on OP's radar when they did the TLH the day after the distributions.
Got it, thanks. I actually didn't know about that rule (or had forgotten). It seems like it would be irrelevant in this situation, though, unless OP has other short term capital gains.
boomer_techie
Posts: 806
Joined: Fri Jan 18, 2019 5:47 am

Re: tax loss harvesting and dividends/capital gains

Post by boomer_techie »

bongo wrote: Tue Feb 04, 2025 7:12 pm We're talking about the 6-month holding rule for capgain distributions when selling for a loss, which was quoted from the Wiki in the OP. A more detailed explanation can be found here https://fairmark.com/investment-taxatio ... hs-or-less
From IRS Publication 550 (page 81 of the 2023 version):
Loss on mutual fund or REIT stock held 6 months or less. If you hold stock in a mutual fund (or other regulated investment company) or REIT for 6 months or less and then sell it at a loss (other than under a periodic liquidation plan), special rules may apply.

Capital gain distributions received. The loss (after reduction for any exempt-interest dividends you received, as explained later) is treated as a long-term capital loss up to the total of any capital gain distributions you received and your share of any undistributed capital gains. Any remaining loss is short-term capital loss.
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

Re: tax loss harvesting and dividends/capital gains

Post by trepid_investor »

toddthebod wrote: Tue Feb 04, 2025 7:48 pm
bongo wrote: Tue Feb 04, 2025 7:12 pm We're talking about the 6-month holding rule for capgain distributions when selling for a loss, which was quoted from the Wiki in the OP. A more detailed explanation can be found here https://fairmark.com/investment-taxatio ... hs-or-less
Got it, thanks. I actually didn't know about that rule (or had forgotten). It seems like it would be irrelevant in this situation, though, unless OP has other short term capital gains.
Well, I actually did have other short-term capital gains in 2024 (which was part of my motivation for tax-loss harvesting last year). So the distinction kind of matters to me -- out of my $6000 in harvested tax losses, I conclude that:
  • $3700 is treated as long-term capital losses
  • $2300 is treated as short-term capital losses
And for the dividends, as has been summarized above already, I take the fraction of shares that have been owned for less than 61 days (1760 / 2760 = 0.6376811594) and multiply that times the QD to determine how many of those should actually be reclassified as non-qualified dividends, i.e.:
  • 1000 + 0.638 * 500 = $1318.84 non-qualified dividends
  • 500 - 318.84 = $181.16 qualified dividends
Do I have it right now?
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

Re: tax loss harvesting and dividends/capital gains

Post by trepid_investor »

bongo wrote: Tue Feb 04, 2025 7:12 pm I've always been surprised that this forum really harps on the 31 day wash sale rule, kind of mentions the 61 day qdiv rule, and barely acknowledges this 6 month rule. Maybe that's why it wasn't on OP's radar when they did the TLH the day after the distributions.
Yes, that's definitely true. I see the wash sale rule mentioned everywhere, but not so much the other two. Still, it was (and is) my responsibility to do my research, and I don't see this as a failure so much as a learning opportunity. Thanks to those of you who are chiming in on this topic to help me learn!
toddthebod
Posts: 8651
Joined: Wed May 18, 2022 12:42 pm

Re: tax loss harvesting and dividends/capital gains

Post by toddthebod »

trepid_investor wrote: Tue Feb 04, 2025 11:15 pm
toddthebod wrote: Tue Feb 04, 2025 7:48 pm
Got it, thanks. I actually didn't know about that rule (or had forgotten). It seems like it would be irrelevant in this situation, though, unless OP has other short term capital gains.
Well, I actually did have other short-term capital gains in 2024 (which was part of my motivation for tax-loss harvesting last year). So the distinction kind of matters to me -- out of my $6000 in harvested tax losses, I conclude that:
  • $3700 is treated as long-term capital losses
  • $2300 is treated as short-term capital losses
And for the dividends, as has been summarized above already, I take the fraction of shares that have been owned for less than 61 days (1760 / 2760 = 0.6376811594) and multiply that times the QD to determine how many of those should actually be reclassified as non-qualified dividends, i.e.:
  • 1000 + 0.638 * 500 = $1318.84 non-qualified dividends
  • 500 - 318.84 = $181.16 qualified dividends
Do I have it right now?
Your short-term capital gains are non-qualified dividends as well. Make sure you aren't double-counting them, though, since they should already be included in box 1a on your 1099-DIV.
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

Re: tax loss harvesting and dividends/capital gains

Post by trepid_investor »

toddthebod wrote: Tue Feb 04, 2025 11:43 pm Your short-term capital gains are non-qualified dividends as well. Make sure you aren't double-counting them, though, since they should already be included in box 1a on your 1099-DIV.
Just when I thought I'd understood what I'd needed to .. :-)

I think you're saying that technically, my short-term capital gains are considered non-qualified dividends too, and I hadn't included them in my summary as such. But your point is true regardless of holding period, so for the purposes of this discussion, I don't need to make any further adjustments because of that technical definition, right?
toddthebod
Posts: 8651
Joined: Wed May 18, 2022 12:42 pm

Re: tax loss harvesting and dividends/capital gains

Post by toddthebod »

trepid_investor wrote: Wed Feb 05, 2025 9:12 am
toddthebod wrote: Tue Feb 04, 2025 11:43 pm Your short-term capital gains are non-qualified dividends as well. Make sure you aren't double-counting them, though, since they should already be included in box 1a on your 1099-DIV.
Just when I thought I'd understood what I'd needed to .. :-)

I think you're saying that technically, my short-term capital gains are considered non-qualified dividends too, and I hadn't included them in my summary as such. But your point is true regardless of holding period, so for the purposes of this discussion, I don't need to make any further adjustments because of that technical definition, right?
Just make sure you are entering numbers from your 1099-DIV in your tax software, not from the detailed statement attached to it in your 1099-Consolidated.
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

Re: tax loss harvesting and dividends/capital gains

Post by trepid_investor »

toddthebod wrote: Wed Feb 05, 2025 9:29 am Just make sure you are entering numbers from your 1099-DIV in your tax software, not from the detailed statement attached to it in your 1099-Consolidated.
Got it, thanks!
User avatar
sycamore
Posts: 7691
Joined: Tue May 08, 2018 12:06 pm

Re: tax loss harvesting and dividends/capital gains

Post by sycamore »

It may just be me but I got lost about which capital gains are being discussed.

First there's the fund's distributions, which all shareholders get. They can be ST or LT based on how long the fund held the underlying assets. These are reported on the 1099-DIV. The STCG should be accounted for in box 1a (total=STCG + non-qualified divs + qualified divs). LTCG in box 2a.

And then there's your realized capital gains that came from you selling your shares. They also can be ST or LT based on how long you held your shares. These are reported on the 1099-B. I think these are the ones you need to adjust if you have a short-term loss and held less than six months.

Or do you also need to adjust the capital gain distributions?
toddthebod
Posts: 8651
Joined: Wed May 18, 2022 12:42 pm

Re: tax loss harvesting and dividends/capital gains

Post by toddthebod »

sycamore wrote: Wed Feb 05, 2025 11:27 am It may just be me but I got lost about which capital gains are being discussed.

First there's the fund's distributions, which all shareholders get. They can be ST or LT based on how long the fund held the underlying assets. These are reported on the 1099-DIV. The STCG should be accounted for in box 1a (total=STCG + non-qualified divs + qualified divs). LTCG in box 2a.

And then there's your realized capital gains that came from you selling your shares. They also can be ST or LT based on how long you held your shares. These are reported on the 1099-B. I think these are the ones you need to adjust if you have a short-term loss and held less than six months.

Or do you also need to adjust the capital gain distributions?
You need to convert the short term loss from selling the shares into long term up to the amount of the long term capital gains distributions.
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

Re: tax loss harvesting and dividends/capital gains

Post by trepid_investor »

sycamore wrote: Tue Feb 04, 2025 3:44 pm Do you use tax software or use a tax preparer/accountant? It would be interesting to see how they handle your situation.
It looks like Cash App's free tax prep platform doesn't really support this situation (at least, it doesn't ask any questions that suggest it might).

So... in this case, how might I "adjust" for some fraction of these dividends being nonqualified because of holding period? Do I just manually decrease the amount in line 1b of my 1099-DIV as I enter it into my tax software?

(I'll probably use another tax software package to sanity check in addition, but I'm wondering if the above is the "correct" approach or if there's another line or form somewhere that I'm supposed to use to make the adjustment)
Topic Author
trepid_investor
Posts: 12
Joined: Mon Feb 03, 2025 1:59 pm

Re: tax loss harvesting and dividends/capital gains

Post by trepid_investor »

sycamore wrote: Wed Feb 05, 2025 11:27 am It may just be me but I got lost about which capital gains are being discussed.

First there's the fund's distributions, which all shareholders get. They can be ST or LT based on how long the fund held the underlying assets. These are reported on the 1099-DIV. The STCG should be accounted for in box 1a (total=STCG + non-qualified divs + qualified divs). LTCG in box 2a.

And then there's your realized capital gains that came from you selling your shares. They also can be ST or LT based on how long you held your shares. These are reported on the 1099-B. I think these are the ones you need to adjust if you have a short-term loss and held less than six months.

Or do you also need to adjust the capital gain distributions?
I think I need to adjust the capital gain distributions (i.e., the qualified dividends amount) because I didn't meet the 61 day holding requirement. I need to recharacterize the same proportion of "qualified" dividends from Line 1b as shares which were not held for 61 days or more. In my example, I believe that means 63.7% of what were reported on Line 1b for this fund must be reported instead as nonqualified dividends.

I think I need to characterize some of the ST realized capital losses as LT capital losses, because I didn't meet the 6-month holding requirement. I need to adjust by the same amount as the LT capital gain distributions from the fund.
Post Reply