Delay tax harvesting?

[smjsl]

If we believe that next years capital gains tax is going to be 20% instead of 15% (or even higher?), does it make sense to delay tax harvesting til next year, so you get a higher write-off for the losses?

(Conversely, it might makes sense take the gains this year to hold on to the 15% rate on your gains.)

 

[brewer12345]

Uhhh, if you harvest excess tax losses that you cannot use (against 2009 cap gains) you can carry them over until next year.

 

[plex]

The taxable gains rate going all the way up to 20% would make it even more important to harvest tax losses while you have them, not less.

 

[teejayevans]

If we believe that next years capital gains tax is going to be 20% instead of 15% (or even higher?), does it make sense to delay tax harvesting til next year, so you get a higher write-off for the losses?

(Conversely, it might makes sense take the gains this year to hold on to the 15% rate on your gains.)

To be clear, this occurs in 2011, not next year (2010).
TJ

 

[teejayevans]

The taxable gains rate going all the way up to 20% would make it even more important to harvest tax losses while you have them, not less.

I don't think so:
Current law is if you are in 15% tax bracket, you LTCGs are taxed at 0%.
So you have 20K in LTGC and remain in the 15% tax bracket, you will pay 0.
So why do tax loss harvesting?? Best to wait until 2011.
This applies to those not in 15% tax bracket, just not as dramatic.

If you have STCGs that are taxed at your regular tax rate, you may want
to harvest losses to offset them.
TJ

 

[mickeyd]

If we believe that next years capital gains tax is going to be 20% instead of 15% (or even higher?), does it make sense to delay tax harvesting til next year, so you get a higher write-off for the losses?

(Conversely, it might makes sense take the gains this year to hold on to the 15% rate on your gains.)

It is seldom smart to make a financial move based on what might or might not take place in the Congress of the US.

 

[smjsl]

I plan to have gains this year and next one. My losses are limited. So my point is that instead of subtracting out losses this year from the gains taxed at 15%, why should not I wait til next year and subtract them out from gains that will be taxed at 20%?

I risk stock market going up and losses disappearing / becoming gains at that point. (On the other side of the coin, market can go down of course and my losses may become even greater then.)

@teejayevans: thanks for mentioned that this will apply to 2011, not 2010. I guess then same logic would be applicable then.

 

[kaneohe]

I risk stock market going up and losses disappearing / becoming gains at that point. (On the other side of the coin, market can go down of course and my losses may become even greater then.)
.

smjsl........if the losses will help you now (i.e. you are not in the 15% bracket considering all taxable income where LTCG rate is 0%), wouldn't you want to take them while you can before they disappear? If the market went down, you could always do another harvest then.

 

[smjsl]

smjsl........if the losses will help you now (i.e. you are not in the 15% bracket considering all taxable income where LTCG rate is 0%), wouldn't you want to take them while you can before they disappear? If the market went down, you could always do another harvest then.

Let's consider a simple example...

Say you have large gains every year (over $1000 for this example) and a loss of $1000 in 15%-tax year; and say next year is 20%-tax year.

Scenario 1 (gain): Your investment increases $600 in value in 20%-tax year (and thus your loss becomes $400)

- if you harvest loss in 15%-tax year, you save $150 on taxes that year, and have a paper gain of $1000.

- if you harvest $400 loss in 20%-tax year, you save $400*20%=$80 and have $400 in paper gain.

Probably makes sense to harvest in first year in this case although depending on how much tax you pay on extra $600 of paper gain and how much time you have to earn extra returns on it, it may become a loss. For example if you don't hold that extra gain for long and sell it at 20% tax, you have to then pay $600*20%=$120, which means in that case you'd be better off delaying harvesting.

Scenario 2 (no change): Your investment does not change value (and remains $1000 loss)

- if you harvest loss in 15%-tax year, you save in taxes $1000*15%=150, and have paper gain of $1000.

- if you harvest loss in 20%-tax year, you save in taxes $1000*20%=$200 and have same paper gain of $1000.

In this scenario, you are better off with delaying harvesting since your $1000 loss is then taken off your taxes with 20% instead of 15% and everything else remains the same.


Scenario 3 (loss): Your investment decreases $600 (and thus your loss is now $1600). This is pretty much the same as scenario 2:

- if you harvest loss in 15%-tax year, and then what you can in 20% year, you save in taxes $1000*15%+600*20%=150+120=$270, and paper gain of $1600.

- if you harvest loss in 20%-tax year, you save in taxes 1600*20%=$320 and have same paper gain of $1600.

As in scenario 2, you got extra $50 in savings and everything else remains the same. And it's for the same reason: the only difference is your $1000 loss is taken off your taxes with 20% instead of 15% and everything else remains the same.

----

More observations:

Now if you go back to scenario 1, you will note that if you realize the paper gain soon enough, the extra $600*20% tax of $120 you'd to have to pay minus the 15%-tax year harvesting gain of $70 ($150-$80) is equal to $50; i.e. same $50 advantage as 20%-tax year harvesting in scenarios 2 and 3...

And, of course $50 is just the $1000 * (20%-15%), i.e. the original loss times the 5% advantage of 20% tax over 15% tax.

 

[kaneohe]

smjsl...........no disagreement w/ your numbers. You show a $70 greater benefit by harvesting now vs harvesting later (if market gains and TLH decreases) and a $50 lesser benefit by harvesting now(and again later) vs harvesting later (if market stays the same or loses more).

For the market gain situation, I was thinking more of the "saturated" condition where the loss disappeared and so no TLH was possible in the next yr. In this case, there would then be a $150 greater benefit by harvesting now vs harvesting later. This would then be compared with the $50 lesser benefit that you calculated if the market tanked further.

Of course, the right thing to do depends entirely on what the market does which requires a crystal ball. I also agree w/ your other comment that TLH total benefits
(as opposed to the immediate benefit) depends on the time value of how much benefit you can get from the TLH. If you sell soon afterwards, there may be no overall benefit. On the other hand, if you hold forever and your heirs inherit w/ stepup in basis, the benefits can be very significant.

 

[free4now]

I'd lean towards delaying the TLH too, but more out of conservatism and it's not clear cut.

But thinking about this, having an inrealized tax loss like this puts you in the strange position of wanting to make sure to sell your position when the price is still low, to avoid having the TL evaporate in a rising market. That is of course exactly the opposite of the normal intention of wanting to sell high. Psychologically this could throw you for a loop.

 

[smjsl]

@kaneohe: I think we agree then with one minor correction perhaps:

If you sell soon afterwards, there may be no overall benefit.

If you sell soon afterwards, you effectively lose the 5% of your tax advantage you would have gained by delaying TLH.

@free4now: well, when you TLH, you should buy right away something similar (but not the same so as not to fall under the wash sale rules); so I don't think there needs to be a "contradiction".