Originally Posted by kaneohe
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.
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.