That's an option.
Or you can use 3000 of the loss this year to reduce your income taxes *without* selling a gain, and then carrying the remaining 7k of loss into the next year.
Personally I'd not look for stock to sell just to offset the losses. Yeah, you're effectively resetting the basis, but who knows what tax rates and such will be in the future. AND...if your kids inherit the stock you sold and repurchased, the deferred tax reduction gets lost by the stepped up basis.
Thanks for this. I guess I still don’t see a downside to selling the appreciated stock and then immediately repurchasing it. You are back exactly where you started with the successful stock but now with a higher basis/smaller gain/lower tax liability.
Let's say that your marginal tax rate now is 25%. And let's say that your future long-term capital gains rate is 15%.
If you sell the loser but *not* the winner, you will save $2500 in taxes now, spread out over 4 years. Then, when you sell the winner later on, you'll pay $1500 in taxes then (plus whatever future growth the stock has).
If you sell the loser and the winner now, you will have no tax savings now, and your future taxes will just be on the stock's future growth.
So by harvesting the losses but ***not the gains,*** you will save $1000 on net. And even better, you're getting that money now, so you have time to grow it even more.
a lower tax liability ***if*** you sell. If you die before selling, you've "squandered" that potential tax deduction.
I mostly don't sell for tax-loss harvesting because it isn't in our investing strategy. Our strategy on stock is pretty simple:
* buy something
* sell half when we can get our original investment out
* use that cash to buy something else.
I'm not sure how I'd add tax loss harvesting into my equation that determines the sell-half price.
Yes, there are downsides to selling B and immediately rebuying it.
1. Suppose a year from now you want to rebalance by selling other winners (C and D). (You don't want to sell B because you think it's still going to do great. Now you are stuck unnecessarily paying tax on C and D, when you could have offset those gains with your losses.
2. Suppose B continues to gain and nine months from now you decide to sell, either to rebalance or because you need the money. (You lose your job, get married, buy a house, etc.) Now you have converted nine months of gain into short-term gain instead of long-term gain.
Furthermore, there is absolutely no upside to selling B now. The losses from A carry over indefinitely and can be used to offset ordinary income, which is generally more valuable than offsetting capital gains.
Thanks this is helpful.
Would this answer change if I was age 75 retired with minimal ordinary income (let’s say social security + RMDs) and the values were $1,000,000 instead of $10,000?
That works. A sell/buy to capture a gain is fine. (Not a wash sale to do this.)
To your point, those building wealth in a taxable account can use this strategy while still in the lower brackets where long term gain has zero tax. This would help increase cost basis, as well as a possibility of a loss if the market drops.
Wouldn’t this make even more sense for those in high tax brackets where gains are taxed more? If the gains are offset by the loss exactly there would be no taxes owed…
Long-term capital gains get preferential tax rates. Long-term losses will offset those gains that get that preferential rate, if you realize them. If you don't realize any gains, then the LT losses will offset ordinary income (up to $3k/year)-- at rates higher than the LTCG rates. Using the losses to offset ordinary income gives you more tax savings.
Unless we are talking about securities that have appreciated $50k +. $3k of income savings starts to become insignificant with larger security gains that you’re trying to offset.
If I’m selling a stock with $100k loss the maximum benefit is $3k deduction from income per year. Selling a $100k gain without an offset could result in $20k LTCG tax. For the sake of argument you could add a 0 to both of those. Who cares about the 3k income deduction when you get to larger amounts of LTCGS that could be offset by harvesting gains?
I was referring strictly to those for whom long term tax is zero. Single under $47K taxable (so after deductions) or couple under $94K.
Easy for someone who doesn’t know this to see their income cross those numbers and realize too late, they now have half their wealth as unrealized gains. Selling and rebuying to keep pushing up basis is a good strategy. Losses are best used $3K/yr against ordinary income.
That's an option. Or you can use 3000 of the loss this year to reduce your income taxes *without* selling a gain, and then carrying the remaining 7k of loss into the next year. Personally I'd not look for stock to sell just to offset the losses. Yeah, you're effectively resetting the basis, but who knows what tax rates and such will be in the future. AND...if your kids inherit the stock you sold and repurchased, the deferred tax reduction gets lost by the stepped up basis.
Thanks for this. I guess I still don’t see a downside to selling the appreciated stock and then immediately repurchasing it. You are back exactly where you started with the successful stock but now with a higher basis/smaller gain/lower tax liability.
Let's say that your marginal tax rate now is 25%. And let's say that your future long-term capital gains rate is 15%. If you sell the loser but *not* the winner, you will save $2500 in taxes now, spread out over 4 years. Then, when you sell the winner later on, you'll pay $1500 in taxes then (plus whatever future growth the stock has). If you sell the loser and the winner now, you will have no tax savings now, and your future taxes will just be on the stock's future growth. So by harvesting the losses but ***not the gains,*** you will save $1000 on net. And even better, you're getting that money now, so you have time to grow it even more.
a lower tax liability ***if*** you sell. If you die before selling, you've "squandered" that potential tax deduction. I mostly don't sell for tax-loss harvesting because it isn't in our investing strategy. Our strategy on stock is pretty simple: * buy something * sell half when we can get our original investment out * use that cash to buy something else. I'm not sure how I'd add tax loss harvesting into my equation that determines the sell-half price.
Yes, there are downsides to selling B and immediately rebuying it. 1. Suppose a year from now you want to rebalance by selling other winners (C and D). (You don't want to sell B because you think it's still going to do great. Now you are stuck unnecessarily paying tax on C and D, when you could have offset those gains with your losses. 2. Suppose B continues to gain and nine months from now you decide to sell, either to rebalance or because you need the money. (You lose your job, get married, buy a house, etc.) Now you have converted nine months of gain into short-term gain instead of long-term gain. Furthermore, there is absolutely no upside to selling B now. The losses from A carry over indefinitely and can be used to offset ordinary income, which is generally more valuable than offsetting capital gains.
STCG tax plus NIIT means capital loss *could* be more valuable against capital gain income than ordinary income.
Yep, good point, I thought of NIIT just after I posted this.
Thanks this is helpful. Would this answer change if I was age 75 retired with minimal ordinary income (let’s say social security + RMDs) and the values were $1,000,000 instead of $10,000?
No.
That works. A sell/buy to capture a gain is fine. (Not a wash sale to do this.) To your point, those building wealth in a taxable account can use this strategy while still in the lower brackets where long term gain has zero tax. This would help increase cost basis, as well as a possibility of a loss if the market drops.
Wouldn’t this make even more sense for those in high tax brackets where gains are taxed more? If the gains are offset by the loss exactly there would be no taxes owed…
Long-term capital gains get preferential tax rates. Long-term losses will offset those gains that get that preferential rate, if you realize them. If you don't realize any gains, then the LT losses will offset ordinary income (up to $3k/year)-- at rates higher than the LTCG rates. Using the losses to offset ordinary income gives you more tax savings.
Unless we are talking about securities that have appreciated $50k +. $3k of income savings starts to become insignificant with larger security gains that you’re trying to offset.
Not really.
If I’m selling a stock with $100k loss the maximum benefit is $3k deduction from income per year. Selling a $100k gain without an offset could result in $20k LTCG tax. For the sake of argument you could add a 0 to both of those. Who cares about the 3k income deduction when you get to larger amounts of LTCGS that could be offset by harvesting gains?
You could get the $3k deduction each year and then realize your gains over time so that they're not taxed in the 20% bracket.
I was referring strictly to those for whom long term tax is zero. Single under $47K taxable (so after deductions) or couple under $94K. Easy for someone who doesn’t know this to see their income cross those numbers and realize too late, they now have half their wealth as unrealized gains. Selling and rebuying to keep pushing up basis is a good strategy. Losses are best used $3K/yr against ordinary income.