Tax Loss harvesting and LT losses carryover - confused

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pasadena
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Tax Loss harvesting and LT losses carryover - confused

Post by pasadena »

Hi Bogleheads,

I'm a little confused about what to do with my capital losses and gains.

My understanding is that LT losses apply against LT gains, and ST losses apply against ST gains. Any excess in losses can be used to reduce your taxable income up to $1,500 (single) and, if any is left, carried over to next year.

But if the above is correct, and if one's marginal tax rate is above 15%, then isn't it always more interesting to take LT losses as a deduction than to cover LT gains? This seems a little weird to me.

Let me give you an example. I currently have the following (example numbers):

Marginal tax rate: 32% fed, 0% state.

ST gains and losses : $900 - $450 = $450, will be taxed at 32%
LT gains and losses: $1,000 - $6,000 = ($5,000)

Now, I need to sell some stocks, for a nominal amount of $5,000. I have shares with a huge LT gain, and shares with a smaller ST gain.

I'm struggling to understand which shares I should sell.

* If I sell my LT shares, I'll have a LT gain of $4,310
* If I sell my ST shares, I'll have a ST gain of $1,720

Help?
nalor511
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by nalor511 »

It might be beneficial to deduct the losses rather than take them against gains, but, you are forced to first take them against gains (if you have gains), so the way to manage this would be to avoid selling shares for gains if you want to carry/deduct the losses.

I recommend using last year's tax software downloaded version (i.e. HRBlock, TurboTax) to model the scenarios you want to look at. The online versions do not typically let you see the tax form calculations that happen in the background.

https://www.thebalance.com/capital-losses-3193426
Topic Author
pasadena
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by pasadena »

nalor511 wrote: Mon Sep 14, 2020 2:50 pm It might be beneficial to deduct the losses rather than take them against gains, but, you are forced to first take them against gains (if you have gains), so the way to manage this would be to avoid selling shares for gains if you want to carry/deduct the losses.

I recommend using last year's tax software downloaded version (i.e. HRBlock, TurboTax) to model the scenarios you want to look at. The online versions do not typically let you see the tax form calculations that happen in the background.

https://www.thebalance.com/capital-losses-3193426
Thank you. That's what is confusing me. Sounds like I would be better off selling my short term shares, for a taxable gain of $1,720, and take $1,500 of my LT losses as a deduction, than taking $4,310 of LT gains, applying LT losses to the whole of it, and being left with $690 of deduction.

You're right, I'll fire up TurboTax and run the simulations. I still feel like I'm missing something
langlands
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by langlands »

Why do you "need" to sell $5000 in stocks? Just checking to make sure you know you can carryover capital losses (at least for federal return) so it's not like they will be wasted.
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pasadena
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by pasadena »

langlands wrote: Mon Sep 14, 2020 4:38 pm Why do you "need" to sell $5000 in stocks? Just checking to make sure you know you can carryover capital losses (at least for federal return) so it's not like they will be wasted.
Yes, I'm aware of that possibility, thank you. I need the money, so I will sell part of my position in this stock, but I'm struggling to identify the shares that would be the most advantageous, given that I already have all that harvested LT capital loss from last spring.
geospatial
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by geospatial »

Schedule D states that the maximum capital loss applied to income is $3000, except if you are married filing separately it's $1500. Where are you seeing that the max capital loss applied to income is $1500 if filing single?
kaneohe
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by kaneohe »

pasadena wrote: Mon Sep 14, 2020 2:47 pm Hi Bogleheads,

I'm a little confused about what to do with my capital losses and gains.

My understanding is that LT losses apply against LT gains, and ST losses apply against ST gains. Any excess in losses can be used to reduce your taxable income up to $1,500 (single) and, if any is left, carried over to next year.

...................................................
Check out Sch D. The above is only part of it. After you net ST losses against ST gains and LT losses against LT gains, you net the ST net against the LT net. If you have an overall loss, you take that loss against ordinary income (up to max of 3K loss w/ the rest carrying over to next yr). If you have an overall net gain, follow the rest of Sch D including the QDIV/CG wksht in the 1040 instructions.
retiredjg
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by retiredjg »

pasadena wrote: Mon Sep 14, 2020 2:47 pm My understanding is that LT losses apply against LT gains, and ST losses apply against ST gains. Any excess in losses can be used to reduce your taxable income up to $1,500 (single) and, if any is left, carried over to next year.
What you have said in the first sentence is right but incomplete. Once you have done the steps you mentioned, whatever losses you have left still offset any leftover gains even if one is short term and one is long term.

After that, any excess loss can be used to offset ordinary income. I thought the limit you can use each year was $3k, but maybe not.
But if the above is correct, and if one's marginal tax rate is above 15%, then isn't it always more interesting to take LT losses as a deduction than to cover LT gains? This seems a little weird to me.
You don't get a choice. It is done in a set way.
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pasadena
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by pasadena »

kaneohe wrote: Mon Sep 14, 2020 5:05 pm
pasadena wrote: Mon Sep 14, 2020 2:47 pm Hi Bogleheads,

I'm a little confused about what to do with my capital losses and gains.

My understanding is that LT losses apply against LT gains, and ST losses apply against ST gains. Any excess in losses can be used to reduce your taxable income up to $1,500 (single) and, if any is left, carried over to next year.

...................................................
Check out Sch D. The above is only part of it. After you net ST losses against ST gains and LT losses against LT gains, you net the ST net against the LT net. If you have an overall loss, you take that loss against ordinary income (up to max of 3K loss w/ the rest carrying over to next yr). If you have an overall net gain, follow the rest of Sch D including the QDIV/CG wksht in the 1040 instructions.
retiredjg wrote: Mon Sep 14, 2020 5:10 pm What you have said in the first sentence is right but incomplete. Once you have done the steps you mentioned, whatever losses you have left still offset any leftover gains even if one is short term and one is long term.

After that, any excess loss can be used to offset ordinary income. I thought the limit you can use each year was $3k, but maybe not.
Ok, thank you. So in my example:

(current situation before selling more shares)
ST gains and losses : $900 - $450 = $450
LT gains and losses: $1,000 - $6,000 = ($5,000)

The $450 excess in ST gains will still be offset by the ($5,000) of LT gains, leaving me with (1) no tax on the $450 and (2) a net loss of $4,550?

And so what shares I decide to sell doesn't matter from a 2020 tax perspective? As long as said gains are below $4,550, they will be offset?

So the only thing I need to really look at, is how to cover all my new gains, while maximizing the amount of loss I can carry over to next year.
geospatial wrote: Mon Sep 14, 2020 5:04 pm Schedule D states that the maximum capital loss applied to income is $3000, except if you are married filing separately it's $1500. Where are you seeing that the max capital loss applied to income is $1500 if filing single?
I've seen conflicting info, to be honest. In doubt I was assuming that it would be the same as MFS, which is usually the case. I was planning on double checking that before pulling the trigger. From memory, the IRS publication does say $3,000 unless you're filing MFS.
langlands
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by langlands »

I think it's very clear you should sell the ST gains. First, there is less gains. Also, ST gains are "worse" than LT gains in the sense that you want to get rid of them more. Finally, since they are completely covered by your losses for the year, you won't pay taxes on them.
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pasadena
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by pasadena »

langlands wrote: Mon Sep 14, 2020 5:42 pm I think it's very clear you should sell the ST gains. First, there is less gains. Also, ST gains are "worse" than LT gains in the sense that you want to get rid of them more. Finally, since they are completely covered by your losses for the year, you won't pay taxes on them.
Yes, that's the part I was missing, that after applying my LT losses to previous LT gains, now I can apply them to new short term gains. So it makes complete sense to sell the short term shares.
retiredjg
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by retiredjg »

pasadena wrote: Mon Sep 14, 2020 5:27 pm ST gains and losses : $900 - $450 = $450
LT gains and losses: $1,000 - $6,000 = ($5,000)

The $450 excess in ST gains will still be offset by the ($5,000) of LT gains, leaving me with (1) no tax on the $450 and (2) a net loss of $4,550?
Yes.
And so what shares I decide to sell doesn't matter from a 2020 tax perspective? As long as said gains are below $4,550, they will be offset?
Yes.
So the only thing I need to really look at, is how to cover all my new gains, while maximizing the amount of loss I can carry over to next year.
Yes, but the loss does not have to be carried over till next year - whatever you have after offsetting this gain can be used to reduce your taxable income this year.
rkhusky
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by rkhusky »

retiredjg wrote: Tue Sep 15, 2020 7:37 am Yes, but the loss does not have to be carried over till next year - whatever you have after offsetting this gain can be used to reduce your taxable income this year.
Up to $3000/year. And I don’t think you have a choice. Any remainder is carried over to the next year.

I would not generate gains, short term or otherwise, just for the sake of using up losses. Use them to offset income and save for a situation where you need to realize gains.
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pasadena
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by pasadena »

retiredjg wrote: Tue Sep 15, 2020 7:37 am
pasadena wrote: Mon Sep 14, 2020 5:27 pm ST gains and losses : $900 - $450 = $450
LT gains and losses: $1,000 - $6,000 = ($5,000)

The $450 excess in ST gains will still be offset by the ($5,000) of LT gains, leaving me with (1) no tax on the $450 and (2) a net loss of $4,550?
Yes.
And so what shares I decide to sell doesn't matter from a 2020 tax perspective? As long as said gains are below $4,550, they will be offset?
Yes.
So the only thing I need to really look at, is how to cover all my new gains, while maximizing the amount of loss I can carry over to next year.
Yes, but the loss does not have to be carried over till next year - whatever you have after offsetting this gain can be used to reduce your taxable income this year.
Thanks!
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pasadena
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by pasadena »

rkhusky wrote: Tue Sep 15, 2020 8:49 am
retiredjg wrote: Tue Sep 15, 2020 7:37 am Yes, but the loss does not have to be carried over till next year - whatever you have after offsetting this gain can be used to reduce your taxable income this year.
Up to $3000/year. And I don’t think you have a choice. Any remainder is carried over to the next year.

I would not generate gains, short term or otherwise, just for the sake of using up losses. Use them to offset income and save for a situation where you need to realize gains.
I agree. In this case I need the money for cash-flow management and I would sell even if I had no losses to offset the gains (and to be honest, it won't hurt to take some profit off the table either :))
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House Blend
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by House Blend »

rkhusky wrote: Tue Sep 15, 2020 8:49 am
retiredjg wrote: Tue Sep 15, 2020 7:37 am Yes, but the loss does not have to be carried over till next year - whatever you have after offsetting this gain can be used to reduce your taxable income this year.
Up to $3000/year. And I don’t think you have a choice. Any remainder is carried over to the next year.
Yes. Phrases like "can be used to reduce taxable income" should not be used in this context, as it leads to unending confusion. (And it amazes me how many financial bloggers are blind to this.)

The only choices you have are what to sell and when to sell it. Once those choices have been made, there are no options involving how one might use any realized gains or losses.[*] At that point, IRS rules and Schedule D take over.

The choice implicit in the "can be" phrasing is valid only in the context of whether one might want to harvest more losses or fewer gains, but folks who do not understand the taxation rules for capital gains can easily miss that.

[*] That's an oversimplification, since a purchase can trigger a wash sale that affects a recently realized loss.
retiredjg
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by retiredjg »

I don't disagree with what you said, but I think you missed the point. My point was that the gains would be used this year, not next year as pasadena appeared to think.
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pasadena
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by pasadena »

retiredjg wrote: Wed Sep 16, 2020 10:36 am I don't disagree with what you said, but I think you missed the point. My point was that the gains would be used this year, not next year as pasadena appeared to think.
I think I understood that. I think what House Blend is pointing out is that you don't really *choose* what to do with losses and gains, if the net loss is <= $3,000 then it will apply this year, and you can't elect to apply it next year instead. The phrasing is a little confusing ("can" when it should be "will").
retiredjg
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by retiredjg »

We all agree. :D
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pasadena
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Re: Tax Loss harvesting and LT losses carryover - confused

Post by pasadena »

retiredjg wrote: Wed Sep 16, 2020 10:57 am We all agree. :D
Exactly :)
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