Best time for TLH

[smjsl]

Here is something useful that I realized in my year-end planning... I figured I would post it both as a tip and to check my understanding if someone sees a flaw in this...

In thinking more about tax loss harvesting, I recently realized that it's best to do tax loss harvesting of LT (long-term) investments when you have 0 or almost no LT gains and a lot of ST gains (similar to my current situation for this year). Since tax-loss will offset ST gains, you save at the ordinary-income-tax rate. If on the other hand, you are offsetting LT cap gains, you are only saving taxes at the cap gains rate during the year.

Later on, even if you sell whatever you buy during your TLH exercise, you will pay at cap gains rate (assuming you hold it longer than a year). In other words, with above scenario, a benefit of TLH would be reducing taxes at ordinary tax rate and then paying taxes at (future) cap gains rate.

If you TLH when you have almost no ST or LT gains, you get to transfer tax savings into the future, but it will again offset LT gains first in future years at lower cap gains rate (up to 3k can be used each year I think if in future years you don't have any ST/LT cap gains).

 

[kaneohe]

If you TLH when you have almost no ST or LT gains, you get to transfer tax savings into the future, but it will again offset LT gains first in future years at lower cap gains rate (up to 3k can be used each year I think if in future years you don't have any ST/LT cap gains).

smjsl.......generally agree w/ what you said. You might consider rewording the quoted paragraph above to reflect that fact that up to 3K of "excess" capital losses can be used against ordinary income in the present and future years (regardless of whether you do or don't have any ST/LT CG that year).

Also for this yr and next, if you are in the 15% bracket (for all income) and have already harvested a LTCG, you might consider whether you would be
"wasting" a small TLH since your LTCG is already taxed at 0% and the small TLH won't help reduce taxes any further (unless it got to be an "excess" loss and could be taken up to 3K against ordinary income).

 

[smjsl]

@kaneohe: Thanks for more info. Since the 3k rule details have not been applicable to me (yet?) due to ST gains exceeding LT losses, I have not studied it much and somewhat hazy on that part, but what you say makes sense.