Cap Gains, Dividends and Tax Loss Harvesting

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dangermouse
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Cap Gains, Dividends and Tax Loss Harvesting

Post by dangermouse » Sun Feb 10, 2019 10:00 am

Hi,
I've been struggling with these 2 questions lately. The question pertains to a taxable account.

1) If you are selling and buying different alike indexes for tax loss purposes, do the dividends on those purchased indexes then get taxed at an ordinary income tax level rather than at the preferential long-term cap gains rate, due to only holding them for a short period of time? My understanding is cap-gains rate on dividends only applies after holding for 1 year plus?

2) Only $5,000 from your capital losses can be applied to your capital gains in any one year?


So if the above two questions are true ito my understanding, I guess where I am struggling is too see the long-term advantage of tax-loss harvesting. If the person is able to live comfortably off the dividends of the account, then it is better not to be doing constant (Betterment style) tax loss harvesting?
Maybe the better way is to create one-off tax loss harvesting occasions, so to limit the impact on the dividends rates?

I can't find a way of doing the maths on this, or maybe I have got it all wrong (more than likely!)

Any help appreciated. Thanks.

Shallowpockets
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by Shallowpockets » Sun Feb 10, 2019 10:50 am

Tax loss harvesting is some thing you do when you have losses. You don't "create" losses. At least I dont. Every investment I make is hopefully going to be a gain in the future.

You offset capitol gains with capitol losses with no limits.
It is not a $5000 limit.
What you probably mean is that if you have enough losses, you can deduct the additonal against $3000 of your income.
If you had $10k gains and $15k losses you could offset that $10k/$10k. With the extra $5k you could use $3k against ordinary income. The remaining $2k of your losses you could carry over to the next years(s) as needed.

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dangermouse
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by dangermouse » Sun Feb 10, 2019 11:21 am

Thanks. Yes I didn't mean that I was trying to create losses! They just happen, especially in today's market.

Thanks for clearing up the use of losses. So basically there is no limit of offset against cap gains, and $3000 can be used against income.

Do the dividends though get taxed at ordinary income if the underlying asset has been held for less than 1 year.

They reason for asking is Betterment and Wealthfront talk a lot about their tax loss harvesting. I am wondering if this would have a substantial impact upon dividend income.

livesoft
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by livesoft » Sun Feb 10, 2019 12:01 pm

So both of your 1 and 2 at not quite correct. To get the correct information, go to the source. Go to the IRS. Please read IRS Publication 550.

You can search in that publication a little bit for things like "Qualified Dividend", but you should read the entire thing at some point.

And I would like to extend that to other tax topics. Find the IRS Publication on the subject and have a go at reading it. You will be a better, more informed, taxpayer for your efforts.
IRS Publication 550 wrote:Holding period. You must have held the stock
for more than 60 days during the 121-day period that begins 60 days before the ex-dividend
date. The ex-dividend date is the first date following the declaration of a dividend on which
the buyer of a stock is not entitled to receive the
next dividend payment. When counting the
number of days you held the stock, include the
day you disposed of the stock, but not the day
you acquired it. See the examples below.
Last edited by livesoft on Sun Feb 10, 2019 12:07 pm, edited 1 time in total.
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Thesaints
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by Thesaints » Sun Feb 10, 2019 12:07 pm

Dividends are never taxed at a capital gains rate, long or short. Some dividends (essentially those from domestic corporations stocks) are taxed at a “Qualified” rate, aka “QDI”. The minimum holding period to take advantage of it is 61 days (iirc) around the record date. That means You’ve held the stock (or the fund) for at least the 60 days immediately before, or you just bought the stock and held it for 60 days after, or anything in between.

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dangermouse
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by dangermouse » Sun Feb 10, 2019 12:31 pm

Who would have thought taxes could be so complicated haha...

I think that does actually clears it up. I took a quick read of 550.

So the way I understand it is your cap gains rates is applied to the qualified dividend. The qualified dividend is as Livesoft stated in 550 "held the stock
for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date."

So that means for what I am asking that if you sell that stock/index (if it has gone down) after the 60 days then that would be good for tax loss purposes, and then immediately buy an alike index.

Is that right?

So then If you accumulated enough tax losses in the year, you could use this against any amount of total gains for the year?

Sorry, I find this probably to be more complicated than it needs to be.

livesoft
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by livesoft » Sun Feb 10, 2019 12:34 pm

^I would not let the fact that I made some of the dividend non-qualified prevent me from tax-loss harvesting. I think one can easily do the calculation to see how much one's taxes would change if more of that particular dividend switched from qualified to non-qualified. The reality could be that the extra taxes are just a few dollars. Knowledge is power; get some.
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Thesaints
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by Thesaints » Sun Feb 10, 2019 12:49 pm

QDI rate has nothing to do with capital gains rates. It is only coincidental if in certain situations the numbers happen to be the same.

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Earl Lemongrab
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by Earl Lemongrab » Sun Feb 10, 2019 2:42 pm

Thesaints wrote:
Sun Feb 10, 2019 12:49 pm
QDI rate has nothing to do with capital gains rates. It is only coincidental if in certain situations the numbers happen to be the same.
You should let the IRS know:
Qualified Dividends

Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain.
https://www.irs.gov/publications/p550#e ... k100010075

Thesaints
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by Thesaints » Sun Feb 10, 2019 3:02 pm

As I wrote, that is purely coincidental. Until Bush's EGTRRA of 2001 dividends were all taxed at one's marginal rate, for instance. Dividends and capital gains are two entirely different species of non-earned income. Each one with its own rules and taxation rates. Claiming that "they are taxed the same" is making a disservice, especially to those who are quite green such as the OP.

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Earl Lemongrab
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by Earl Lemongrab » Sun Feb 10, 2019 3:33 pm

Thesaints wrote:
Sun Feb 10, 2019 3:02 pm
As I wrote, that is purely coincidental. Until Bush's EGTRRA of 2001 dividends were all taxed at one's marginal rate, for instance. Dividends and capital gains are two entirely different species of non-earned income. Each one with its own rules and taxation rates. Claiming that "they are taxed the same" is making a disservice, especially to those who are quite green such as the OP.
Why do you think it is a coincidence? Just because they are different things doesn't prevent the tax law from giving them similiar treatment.

Edit: To (hopefully) forestall further arguing, I recommend looking up the term "adjusted net capital gain". This is the result of combining net long-term capital gains and qualified dividends for the purpose of tax calculation. So no "coincidence" that they have the same rates. It's explicit in the tax law.
Last edited by Earl Lemongrab on Sun Feb 10, 2019 4:21 pm, edited 1 time in total.

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dangermouse
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by dangermouse » Sun Feb 10, 2019 3:37 pm

Ok thanks for the clarification and healthy discussion, knowledge is certainly power, hence why I am trying to get some.

So let's say a person has $1,000,000. The only income this person is taking is from Qualified Dividends (say 2% dividend yield for ease), so roughly $20,000. They have no other income coming in. They tax loss harvest say $20,000 from one tax loss sale, re-investing immediately in a similar index.

In this scenario that person would pay 0% on the $20,000 qualified dividend yield, because they are able to offset this with their tax loss.

livesoft
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by livesoft » Sun Feb 10, 2019 3:43 pm

dangermouse wrote:
Sun Feb 10, 2019 3:37 pm
Ok thanks for the clarification and healthy discussion, knowledge is certainly power, hence why I am trying to get some.

So let's say a person has $1,000,000. The only income this person is taking is from Qualified Dividends (say 2% dividend yield for ease), so roughly $20,000. They have no other income coming in. They tax loss harvest say $20,000 from one tax loss sale, re-investing immediately in a similar index.

In this scenario that person would pay 0% on the $20,000 qualified dividend yield, because they are able to offset this with their tax loss.
No. Realized capital losses offset realized capital gains*. Dividends are not realized capital gains.

The taxpayer may pay 0% on $20,000 of qualified dividend income because of the standard deduction, the $3,000 allowance of realized capital losses to offset ordinary income (include qualified ordinary dividend income) and the 0% qualified dividend income tax rate for their tax bracket. Use tax prep software to see this.

*If realized capital losses exceed realized capital gains, then up to $3,000 of excess losses are used to offset ordinary income. Ordinary income is income that is not tax-exempt income and is not capital gains income. Thus, dividend income is one kind of ordinary income.
Last edited by livesoft on Sun Feb 10, 2019 3:46 pm, edited 1 time in total.
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Topic Author
dangermouse
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by dangermouse » Sun Feb 10, 2019 3:46 pm

Ok thanks for the clarification. Are you aware of any good tax software that allows for simulations of different scenarios?

livesoft
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by livesoft » Sun Feb 10, 2019 3:47 pm

dangermouse wrote:
Sun Feb 10, 2019 3:46 pm
Ok thanks for the clarification. Are you aware of any good tax software that allows for simulations of different scenarios?
HR Block tax prep software download version lets one simulate any tax return.
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Earl Lemongrab
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by Earl Lemongrab » Sun Feb 10, 2019 3:59 pm

dangermouse wrote:
Sun Feb 10, 2019 3:37 pm
Ok thanks for the clarification and healthy discussion, knowledge is certainly power, hence why I am trying to get some.

So let's say a person has $1,000,000. The only income this person is taking is from Qualified Dividends (say 2% dividend yield for ease), so roughly $20,000. They have no other income coming in. They tax loss harvest say $20,000 from one tax loss sale, re-investing immediately in a similar index.

In this scenario that person would pay 0% on the $20,000 qualified dividend yield, because they are able to offset this with their tax loss.
Dividends are not directly offset by capital losses the way capital gains are. However, absent any ordinary income, all of the QDivs would be in the 0% bracket anyway.

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dangermouse
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Re: Cap Gains, Dividends and Tax Loss Harvesting

Post by dangermouse » Sun Feb 10, 2019 4:03 pm

Thanks all. This has been really informative.

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