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Long term loss combined with long term gain
Old 12-19-2012, 08:59 AM   #1
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Long term loss combined with long term gain

I'm in a situation where I'm carrying over a large long-term loss on my income tax. Every year I would take $3,000 loss off of it and carry the rest over to the next tax year. In the meantime I've been fortunate enough to produce a long term gain in my after tax brokerage accounts that matches in value my long term loss. Knowing that tax laws are going to change next year, is there any advantage or disadvantage to capturing the gain and neutralizing the loss? My intention would be to buy back similar stock right after I sell to dodge the wash rule.
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Old 12-19-2012, 09:12 AM   #2
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I'm looking to do similar. I'm sitting on some large CG in some muni bond funds, that I don't want to waste when interest rates start rising. But I am not selling for the tax changes, but more so because the dividends from the funds have taken a substantial decrease in 2012. I have some losses to take to offset the gains.

The tax changes are not certain yet so that is another issue. Buying back similiar stock you potentially lower your cost basis going forward.
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Old 12-19-2012, 09:21 AM   #3
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Absent the tax harvesting, would you let the long term gain ride and grow larger for some years? If so, you may be better off keeping the loss carryover to use against higher rates next year instead of using it now.
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Old 12-19-2012, 09:23 AM   #4
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is there any advantage or disadvantage to capturing the gain and neutralizing the loss?

I looked into this, my thinking may be off so I'm interested in other views, but it doesn't appear to make any difference to me.

Whether the Cap Gains Rate is 0% or 50%, you are neutralizing, so you pay no cap gains tax in either case. Any future cap gains will be paid in the future, at future rates, either way.

Seems like a wash to me, but maybe I'm missing something.

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Old 12-19-2012, 09:38 AM   #5
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Absent the tax harvesting, would you let the long term gain ride and grow larger for some years?

My intention would be to hold stock that I bought back for the long term. I've been racking my brain on this for a while. And these are the only two pro-con points I can think of:

1) If I sell, my long-term gains would become short term gains for a year. Likewise for dividends. I would have to wait a year for my stocks to produce qualified dividends.

2) If I hold on to my loss and I happened to (heaven forbid) die, my heirs would lose the stock loss and they would still be on the hook to pay my gains.
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Old 12-19-2012, 09:44 AM   #6
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Originally Posted by dmpi View Post
Absent the tax harvesting, would you let the long term gain ride and grow larger for some years?

My intention would be to hold stock that I bought back for the long term. I've been racking my brain on this for a while. And these are the only two pro-con points I can think of:

1) If I sell, my long-term gains would become short term gains for a year. Likewise for dividends. I would have to wait a year for my stocks to produce qualified dividends.

2) If I hold on to my loss and I happened to (heaven forbid) die, my heirs would lose the stock loss and they would still be on the hook to pay my gains.

You have a lot of wrong thinking going on here....


First, the wash rule is for LOSSES that you incur, not gains... if you sell stocks for a gain and buy them back even within a minute, you pay taxes on the gain... (you said you had loss carryforwards, so I am assuming that the gain is in the stock you want to sell)....


Second, your heirs will NOT have to pay taxes on your gains... there is a step up in basis when you die.... ALL gains go untaxed....
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Old 12-19-2012, 01:48 PM   #7
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Something you might wish to consider:

In a year in which you have no long-term gains, you can use the long-term loss to offset short-term gains which are taxed at higher ordinary income rates. This might be a better way to use your long-term loss.

Also, you don't have to hold a stock for a year to qualify the dividend, just 61 days around the ex-dividend date.
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Old 12-19-2012, 04:43 PM   #8
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FIRE'd @51 makes a good point on optimizing the use of the tax loss carryover.

As far as timing, I think it is a wash in that if you realize the gains now you utilize the losses to avoid 15% CG tax and if you realize the gains later and CG rates have increased then you utilize the gains to offset the higher rates, but either way you pay 0 CG taxes on the next gains realized equal to your loss carryover.

If you have ordinary income and your marginal tax rate is higher than the capital gains rate then you get a better benefit by using the $3,000 a year. You can always use the tax losses later.
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Old 12-21-2012, 03:57 PM   #9
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Thanks everyone for all the information. Most of what I thought was true was wrong. In my situation it's clear that not selling would give me more flexibility and options in the future.
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Old 12-21-2012, 04:27 PM   #10
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If one makes a couple of reasonable assumptions:

1. Carryover losses will offset realized cap gains no matter what the cap gains tax rate, and

2. Cap gains tax rates will not be higher than one's marginal income tax rate,

THEN

it pays to keep deducting $3,000 against ordinary income and not use up carryover losses against unnecessarily realized cap gains.

That is, there IS A DIFFERENCE between the two scenarios. THEY ARE NOT the same.

However, if there is a surcharge on investment income and your investment income is already taxed at your marginal income tax rate, then you will actually pay a higher tax rate on investment income than you do on earned income. Ouch!
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