TLH: Does it matter if it is sold as short-term or long-term losses?

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AndroAsc
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TLH: Does it matter if it is sold as short-term or long-term losses?

Post by AndroAsc »

I know there is differences in taxation treatment for short-term vs long-term capital gains.

Is there any difference in treatment for TLH short-term vs long-term losses (loosely defined as whether Vanguard states it as "Long" or "Short") under the SpecificID interface)?
livesoft
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by livesoft »

Of course it matters … otherwise there would be no distinction.

Suppose you want to go back to original holdings in 31 days, but your shares have a short-term gain. Well, short-term losses will offset short-term gains first. Search for more details on the forum.

Once you have all these losses hanging around, it is quite liberating. One can do buying and selling without worrying about taxes. Just think of all the Market Timing possibilities that you can use to make money!
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AndroAsc
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by AndroAsc »

I was looking at the wiki:

https://www.bogleheads.org/wiki/Capital ... stribution

Short-term capital gains distributions are made from realized gains on securities held for one year or less. Short-term gains are taxed at ordinary income tax rates Short-term gain distributions are included in a fund's ordinary dividend distribution; therefore, capital losses may not be subtracted from these distributions when computing taxes.

Long-term capital gains distributions are made from realized gains on securities held for more than one year. They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.


Seems that short-term gains cannot be offset?
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AndroAsc
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by AndroAsc »

Ok, this is confusing

https://turbotax.intuit.com/tax-tools/t ... 12052.html

Losses on your investments are first used to offset capital gains of the same type. So short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains.

First it states that short-term losses can be used to offset short-term gains, and long-term losses to offset long-term gains, but then:

Net losses of either type can then be deducted against the other kind of gain. So, for example, if you have $2,000 of short-term loss and only $1,000 of short-term gain, the net $1,000 short-term loss can be deducted against your net long-term gain (assuming you have one).

But in the next sentence they claim that short-term loss can be used to off-set long term gains? So can long-term loss be used to offset short-term gains also?
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AndroAsc
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by AndroAsc »

It seems that every source have a different answer:

http://www.fool.com/personal-finance/ta ... osses.aspx

Fool.com pretty much says it doesn't matter whether it is short-term or long-term losses, as either can be used to offset either long or short-term gains, and either losses carry over after deducting $3k for ordinary income.

So who is correct?
Clumsum
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by Clumsum »

Long term gains are taxed at 15%. Short term gains are taxed at your tax bracket when over 15%!tax bracket.
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AndroAsc
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by AndroAsc »

Clumsum wrote:Long term gains are taxed at 15%. Short term gains are taxed at your tax bracket when over 15%!tax bracket.
I understand the different tax treatment for LT vs ST gains, but also wondering about any differences between LT vs ST losses. It seems that (according to Fool.com, Kiplinger and Turbotax - although Intuit did a bad explanation) that ultimately LT vs ST losses seem to be the same in terms of using it to offset gains.

Sure ST losses are applied to ST gains, and LT losses are applied to LT gains, but the net ST/LT loss can be applied to both ST/LT gains, so is there any need to distinguish ST vs LT losses from a practical standpoint? It looks like they both can deduct $3k off ordinary income, they both can carryover to the next year...
livesoft
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by livesoft »

Suppose I have $10K in carryover LT losses. Now I book $10K in LT gains and $5K in ST gains. What are my taxes?

Suppose I have $10K in ST carryover losses. Now I book $10K in LT gains and $5K in ST gains. What are my taxes?
Last edited by livesoft on Mon Jan 11, 2016 9:56 pm, edited 1 time in total.
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House Blend
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by House Blend »

1. Capital gains can be realized by you when you sell shares, but they can also be passed on to you when the fund itself has to sell shares internally. The latter are called capital gain distributions. If all you hold in taxable are Vanguard stock index funds, you might never see a capital gain distribution for the rest of your life.

But if you do, then you should understand that LT cap gain distributions are taxed the same way as LT gains that you realize from your own sales of shares. They get netted in with your other LT gains and losses and appear on Schedule D.

However, ST cap gain distributions are not taxed the same as ST gains you realize from your sales. And they are not reported on Schedule D. They are reported as interest, and are taxed the same way as ordinary income. They cannot be cancelled by ST or LT losses you realize, except up to the usual $3,000 potential cancellation that can happen with all forms of taxable income.

2. Yes, your long term losses can be used to cancel any short term gains you have, but only if you have more LT losses than LT gains.

And as mentioned in item 1, you cannot cancel short term capital gain distributions with any flavor of losses unless all of your losses exceed all of your gains. In that case, you will cancel the excess losses, up to a max of $3000, against any flavor of taxable income.
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AndroAsc
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by AndroAsc »

livesoft wrote:Suppose I have $10K in carryover LT losses. Now I book $10K in LT gains and $5K in ST gains. What are my taxes?

Suppose I have $10K in ST carryover losses. Now I book $10K in LT gains and $5K in ST gains. What are my taxes?
First scenario is paying taxes on $5k ST gains, since $10k LT losses cancels out with $10k LT gains
Second scenario is paying taxes on $5k LT gains, since $5k ST losses cancels out with $5k ST gains, and the remaining $5k ST losses offset the $10k LT gains.

From this, can I generalize that ST losses are generally more "desirable"/"valuable" than LT losses? If yes, do you make it a point to monitor your fund in the first year to harvest short-term losses?
Last edited by AndroAsc on Tue Jan 12, 2016 12:37 am, edited 1 time in total.
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AndroAsc
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by AndroAsc »

House Blend wrote:1. Capital gains can be realized by you when you sell shares, but they can also be passed on to you when the fund itself has to sell shares internally. The latter are called capital gain distributions. If all you hold in taxable are Vanguard stock index funds, you might never see a capital gain distribution for the rest of your life.

But if you do, then you should understand that LT cap gain distributions are taxed the same way as LT gains that you realize from your own sales of shares. They get netted in with your other LT gains and losses and appear on Schedule D.

However, ST cap gain distributions are not taxed the same as ST gains you realize from your sales. And they are not reported on Schedule D. They are reported as interest, and are taxed the same way as ordinary income. They cannot be cancelled by ST or LT losses you realize, except up to the usual $3,000 potential cancellation that can happen with all forms of taxable income.

2. Yes, your long term losses can be used to cancel any short term gains you have, but only if you have more LT losses than LT gains.

And as mentioned in item 1, you cannot cancel short term capital gain distributions with any flavor of losses unless all of your losses exceed all of your gains. In that case, you will cancel the excess losses, up to a max of $3000, against any flavor of taxable income.
Ok, I think I was missing something. To clarify, there is a difference between Capital Gains (from when I buy/sell funds) vs Capital Gains Distribution (from when the fund internally buy/sell underlying stocks)?

So if I have this right

For Capital Gains: ST losses offset ST gains, LT losses offset LT gains, remaining "net" ST/LT losses offet ST/LT gains
For Capital Gains Distribution: ST losses are reported as interest and taxed as ordinary income. ST losses cannot be offset by ST/LT losses. LT losses are treated the same way as in capital gains.
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Epsilon Delta
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by Epsilon Delta »

AndroAsc wrote: For Capital Gains Distribution: ST losses are reported as interest and taxed as ordinary income. ST losses cannot be offset by ST/LT losses. LT losses are treated the same way as in capital gains.
I assume this is a typo for:

For Capital Gains Distribution: ST gains are reported as interest and taxed as ordinary income. ST gains cannot be offset by ST/LT losses. LT gains are treated the same way as in capital gains.

If it's not a typo: Funds never distribute capital losses. Instead they are carried forward and net against future gains before gains are distributed.
livesoft
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by livesoft »

AndroAsc wrote:From this, can I generalize that ST losses are generally more "desirable"/"valuable" than LT losses? If yes, do you make it a point to monitor your fund in the first year to harvest short-term losses?
Answers: Yes. Absolutely. I mention this all the time. There is also one more good reason why I always try to harvest losses when they are still short-term.
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AndroAsc
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by AndroAsc »

livesoft wrote:
AndroAsc wrote:From this, can I generalize that ST losses are generally more "desirable"/"valuable" than LT losses? If yes, do you make it a point to monitor your fund in the first year to harvest short-term losses?
Answers: Yes. Absolutely. I mention this all the time. There is also one more good reason why I always try to harvest losses when they are still short-term.
Thanks, really appreciate your help in handholding me through this. From the sound of it, I guess you have a similar but not identical fund for almost every asset class that you intend to TLH in taxable? That would almost double the number of funds in my portfolio... I hope it's worth the extra effort. I got to modify my spreadsheet to include the TLH-counterpart fund for my asset classes now :D
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AndroAsc
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by AndroAsc »

Epsilon Delta wrote:
AndroAsc wrote: For Capital Gains Distribution: ST losses are reported as interest and taxed as ordinary income. ST losses cannot be offset by ST/LT losses. LT losses are treated the same way as in capital gains.
I assume this is a typo for:

For Capital Gains Distribution: ST gains are reported as interest and taxed as ordinary income. ST gains cannot be offset by ST/LT losses. LT gains are treated the same way as in capital gains.

If it's not a typo: Funds never distribute capital losses. Instead they are carried forward and net against future gains before gains are distributed.
Yup, that was a typo. I meant gains. Thanks.
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Epsilon Delta
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by Epsilon Delta »

livesoft wrote:
AndroAsc wrote:From this, can I generalize that ST losses are generally more "desirable"/"valuable" than LT losses? If yes, do you make it a point to monitor your fund in the first year to harvest short-term losses?
Answers: Yes. Absolutely. I mention this all the time. There is also one more good reason why I always try to harvest losses when they are still short-term.
ST losses are never worse than LT losses, but they are only better if you realize ST gains. If you're a pretty passive investor you may never realize ST gains so it's not worth a lot of effort to harvest ST gainslosses v. LT gainslosses.

Arg: edited to fix typo.
Last edited by Epsilon Delta on Tue Jan 12, 2016 1:08 pm, edited 1 time in total.
lairdb
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by lairdb »

Epsilon Delta wrote: ST losses are never worse than LT losses, but they are only better if you realize ST gains. If you're a pretty passive investor you may never realize ST gains so it's not worth a lot of effort to harvest ST gains v. LT gains.
Plus the slight ($3000) offset of Ordinary Income, right?
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Epsilon Delta
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by Epsilon Delta »

lairdb wrote:
Epsilon Delta wrote: ST losses are never worse than LT losses, but they are only better if you realize ST gains. If you're a pretty passive investor you may never realize ST gains so it's not worth a lot of effort to harvest ST gainslosses v. LT gainslosses
(typo fixed in my original

Plus the slight ($3000) offset of Ordinary Income, right?
LT losses are as good as ST losses for offsetting ordinary income. I'm not saying I don't harvest the losses, I just don't bother making an effort to make then ST.
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by livesoft »

In my experience I rarely if ever have any LT losses to harvest because I have diligently harvested losses every year while they are still short term.

Once one gets into the habit, then I think one won't wait before losses go long term. Of course, a 2008 happens every now and then.
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by keystone »

Epsilon Delta wrote:
livesoft wrote:
AndroAsc wrote: ST losses are never worse than LT losses, but they are only better if you realize ST gains. If you're a pretty passive investor you may never realize ST gains so it's not worth a lot of effort to harvest ST gainslosses v. LT gainslosses.

Arg: edited to fix typo.
Yes. I have been reading this thread with amusement, because I cannot foresee any circumstance where I would need to offset sizable short term gains. So I really don't care about short term vs. long term losses, I only care about losses so that I can deduct 3K from my taxes. It just so turns out that most of my losses are short term, but the end result is going to be the same for passive investors like me.
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by House Blend »

keystone wrote:
Epsilon Delta wrote:
livesoft wrote:
AndroAsc wrote: ST losses are never worse than LT losses, but they are only better if you realize ST gains. If you're a pretty passive investor you may never realize ST gains so it's not worth a lot of effort to harvest ST gainslosses v. LT gainslosses.
Yes. I have been reading this thread with amusement, because I cannot foresee any circumstance where I would need to offset sizable short term gains.
Even if you can't forsee a circumstance, that doesn't prevent the OP from having one. See the OPs other thread where it is revealed that he will be shedding taxable shares in order to start maxing out a Mega Backdoor Roth. YMMV.

I do agree that you may as well take losses whenever they are big enough to be worth it. In practice, you will get a fair share of ST losses that way anyway. And you have to work hard to cook up an example where you would wish that more of your losses were ST.
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by grabiner »

livesoft wrote:In my experience I rarely if ever have any LT losses to harvest because I have diligently harvested losses every year while they are still short term.

Once one gets into the habit, then I think one won't wait before losses go long term. Of course, a 2008 happens every now and then.
You don't need a 2008 to get long-term losses. I harvested my Emerging Markets Index last week, taking a short-term loss on shares bought in October 2015 (which were bought after I harvested a previous loss in August), and a long-term loss on shares bought in 2010.
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Re: TLH: Does it matter if it is sold as short-term or long-term losses?

Post by Johnsson »

livesoft wrote: Mon Jan 11, 2016 9:54 pm Suppose I have $10K in carryover LT losses. Now I book $10K in LT gains and $5K in ST gains. What are my taxes?

Suppose I have $10K in ST carryover losses. Now I book $10K in LT gains and $5K in ST gains. What are my taxes?
I'm bringing this post back to life from 2 years ago because it addresses a question I hadn't seen answered as succinctly as in Livesoft's example above... Why are ST losses more desireable? Thank you to Hockeyfan99 and Livesoft.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra
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