Harvest Tax Loss by Fund Switch?

[FIREd]

Short term capital losses should first offset short term capital gains (step 1), then long term capital gains (step 2) and then regular income (step 3). Long term capital losses should first offset long term capital gains. When offsetting regular income, you must first use up all short term capital losses before can use long term capital losses.

Example: this year you have $7000 in short term capital losses and $500 in long term capital losses. Let's also assume you have $500 in short term capital gains and $2000 in long term capital gains.

Net short term capital gain/loss: $500 - $7000 = ($6500) short term capital loss (schedule D, section 1) - That's step 1.
Net long term capital gain/loss: $2000 - $500 = $1500 short term capital gain (schedule D, section 2)

Then you add the two: $1500 - $6500 = ($5000) capital loss. So in effect this year's net short term capital losses offset this year's net long term capital gains. That's step 2.

Then you can offset your regular income for this year by $3000 (that's step 3) and carryover $2000 worth of your capital losses to offset next's years capital gains and, if anything is left, next year's regular income.

Now, the carryover losses do remain categorized as short term and long term (you need to use the IRS worksheet to determine how much of the $2000 carryover are short term capital losses and how much are long term capital losses). Short term capital loss carryovers will first offset next year's short term capital gains and long term capital loss carryovers will first offset next year's long term capital gains.

Let's continue our example:
I will assume that the whole $2000 in carryover is categorized as short term capital loss as per the IRS worksheet. Let's assume that next year you have $500 in short term capital gains and $5000 in long term capital gains.

So next year:
Net short term capital gain/loss: $500 - $2000 (short term carryover loss) = ($1500) short term capital loss (schedule D, section 1)
Net long term capital gain/loss: $5000 - $0 (long term carryover loss) = $5000 short term capital gain (schedule D, section 2)

Then you add the two: $5000 - $1500 = $3,500 capital gain. So in effect this year's short term capital losses will offset next year's net long term capital gains. But remember this year's short term capital losses will first offset next year's short term capital gains, and only what's left of the carryover can then be used to offset next year's long term capital gains.

[clifp]

FIREDreamers example is correct AFAIK and quite detailed.

Conceptually the easiest way to think about this is you add up all the capital losses and gains, then figure out if it is short term or long term.

[kaneohe]

Quote:

Originally Posted by FIREdreamer Example: this year you have $7000 in short term capital losses and $500 in long term capital losses. Let's also assume you have $500 in short term capital gains and $2000 in long term capital gains. Net short term capital gain/loss: $500 - $7000 = ($6500) short term capital loss (schedule D, section 1) - That's step 1. Net long term capital gain/loss: $2000 - $500 = $1500 short (LONG??)term capital gain (schedule D, section 2) So next year: Net short term capital gain/loss: $500 - $2000 (short term carryover loss) = ($1500) short term capital loss (schedule D, section 1) Net long term capital gain/loss: $5000 - $0 (long term carryover loss) = $5000 short (LONG??)term capital gain (schedule D, section 2)

FD---I agree w/ clifp about your nicely detailed tutorial. A minor pt perhaps---should the last "short" in each of the phrases above be "long".
You do say "long" at the beginning of each sentence so someone would probably be ok but it might be a little confusing to others. Probably a cut and paste carryover

[FIREd]

Kaneohe,

you are quite right, I used copy and paste and forgot to change it.
Since I can't edit my original post, I will post it again here:


Short term capital losses should first offset short term capital gains (step 1), then long term capital gains (step 2) and then regular income (step 3). Long term capital losses should first offset long term capital gains. When offsetting regular income, you must first use up all short term capital losses before can use long term capital losses.

Example: this year you have $7000 in short term capital losses and $500 in long term capital losses. Let's also assume you have $500 in short term capital gains and $2000 in long term capital gains.

Net short term capital gain/loss: $500 - $7000 = ($6500) short term capital loss (schedule D, section 1) - That's step 1.
Net long term capital gain/loss: $2000 - $500 = $1500 short long term capital gain (schedule D, section 2)

Then you add the two: $1500 - $6500 = ($5000) capital loss. So in effect this year's net short term capital losses offset this year's net long term capital gains. That's step 2.

Then you can offset your regular income for this year by $3000 (that's step 3) and carryover $2000 worth of your capital losses to offset next's years capital gains and, if anything is left, next year's regular income.

Now, the carryover losses do remain categorized as short term and long term (you need to use the IRS worksheet to determine how much of the $2000 carryover are short term capital losses and how much are long term capital losses). Short term capital loss carryovers will first offset next year's short term capital gains and long term capital loss carryovers will first offset next year's long term capital gains.

Let's continue our example:
I will assume that the whole $2000 in carryover is categorized as short term capital loss as per the IRS worksheet. Let's assume that next year you have $500 in short term capital gains and $5000 in long term capital gains.

So next year:
Net short term capital gain/loss: $500 - $2000 (short term carryover loss) = ($1500) short term capital loss (schedule D, section 1)
Net long term capital gain/loss: $5000 - $0 (long term carryover loss) = $5000 short long term capital gain (schedule D, section 2)

Then you add the two: $5000 - $1500 = $3,500 capital gain. So in effect this year's short term capital losses will offset next year's net long term capital gains. But remember this year's short term capital losses will first offset next year's short term capital gains, and only what's left of the carryover can then be used to offset next year's long term capital gains.

[charlie]

Thanks to All for your inputs.

For better or worse, I traded in my taxable stock funds for the 5% Managed Payout fund yesterday and reaped $36,000 in short term loss. I decided to reinvest the monthly payout until I need the income or the capital return component drops to zero, whichever comes first. Fortunately, Lyn and I have enough cash reserves and recently inherited EE bonds to wait several years while the fund recovers (hopefully).

Cheers,

Charlie