How to use Tax-Loss Harvesting?

[Stillwater007]

I invested around 10k into a single stock (AMRN) back in Dec 2019. Yes, despite all of the assurances from a family member that he strongly believed the stock would go up by A LOT, it was a RISKY and possibly dumb decision at the time. In hindsight, it definitely was.

So this stock it began to drop soon after I invested in Dec 2019 and then tanked in March 2020. I didn't sell as I wanted to be patient and give it a chance to recover. It really hasn't recovered since as it's been around 25% it's original value. I lost patience and sold about half of my stock back in February 2021. I haven't re-invested what I sold, which may be Mistake #2. I still have half or around $2500 left in the stock and I am ready to bite the bullet and sell all of it.

Is there anything I can do to help with my losses, such as Tax-Loss Harvesting? It sounds like if I can do this, but do I need to invest in something similar to the AMRN stock? If so, what can that be? Quite frankly, I would prefer to re-invest in an index fund if that's allowed to meet the criteria.

Besides Tax-Loss Harvest, is there anything else besides reading up on more Investment Books?

Thanks in advance!

 

[38Chevy454]

Tax loss harvesting is only beneficial in an after tax account. No benefit if this is inside an IRA or similar pretax account. To answer your basic question, the loss is used to offset gains in the after tax account in that same year as the loss was incurred. So if you have approx $5000 loss on that stock assuming you sell it all, it can be used to offset up to the approx $5000 of gains in the rest of your (after tax) account. Any gains over $5000 would be taxable in that year.

Due to IRS rules, they will limit the total loss you can claim on taxes in a given year, to $3000. That is total for the account, so if you had $1000 in gains with the $5000 loss, IRS says you can only use $3000 loss as income adjustment; and have to carry over the remaining $1000 to future year taxes where that $1000 can be used to offset gains in that future year.


Edit to add: you do not have to do anything with the cash from the loss sale. You can keep it in cash, or invest in stocks, so an index fund is good choice. You can't invest back into AMRN unless 30 days has passed, before 30 days it gets into wash sale rules.

 

[TheWizard]

Quite simple to TLH from an individual stock since no other investment can be similar.
So just sell those shares with the same custodian you bought them with and you'll get a 1099-B early the following year showing the loss.
Punch the numbers from that form into your tax software and you're all done.

What you do with the proceeds from that sale is a completely separate issue, assuming you don't buy back shares of that stock within 31 days...

 

[TheWizard]

Due to IRS rules, they will limit the total loss you can claim on taxes in a given year, to $3000. That is total for the account, so if you had $1000 in gains with the $5000 loss, IRS says you can only use $3000 loss as income adjustment; and have to carry over the remaining $1000 to future year taxes where that $1000 can be used to offset gains in that future year.

Are you sure this is right?
The $3000 per year limitation is just for offsetting ordinary income.
You could use the entire $5000 capital loss to offset $5000 of realized capital gains in the same year if you had them...

 

[Stillwater007]

I'm sorry I left out an important detail.

So that investment was through my Bank's (Chase) Brokerage division. It's not a retirement account. And it was my only one single stock I invested in through a non-tax sheltered acct.
Since then, I've solely invested in Retirement savings (tax sheltered) with Vanguard.

So it looks like I can't really offset/ TLH that stock's loss?

 

[RunningBum]

In your case, you would take up to a $3000 reduction against regular income. The rest is carried over to the next year. If you have any capital gains next year, you would take the carry over amount to offset that gain. If no gains or still some left, you get another $3000 reduction in income, and the remaining is carried over to the following year. And so on.

 

[Midpack]

I must be missing something.

Why do you care about tax loss harvesting, you have a loss regardless, nothing will change that? If you don’t have any realized capital gains to offset the loss (from any stock sale), you’ll be reporting a net loss - up to $3000 per year, the rest if any will have to carry over. So though you’ve lost on the stock, you’ll get a tax benefit (reduced AGI) without doing anything else. If there’s no hope for the stock and you want to sell the rest, you’ll have the loss to reduce AGI until you use it up (carryovers if needed), so you don’t have to wait for another year.

 

[marko]

Reviving this thread with a question.

With bond funds dropping like the Hindenburg, I was looking at a tax loss harvest by selling a good chunk/all of my bond fund.

On TRPrice's website for my account the word "covered" is next to the bond fund's balance. What does that mean? No other fund in my after tax account has that designation but they are all still in the positive range

 

[pb4uski]

Covered means that TRPrice is tracking the cost basis of those shares and will report the sales proceeds and cost basis to the IRS if you sell.

 

[marko]

Covered means that TRPrice is tracking the cost basis of those shares and will report the sales proceeds and cost basis to the IRS if you sell.

Thanks!

 

[joesxm3]

You need to be careful with TRP and non-covered shares.

If you have both covered and non-covered in a fund, they will automatically sell the non-covered shares first and they compute the basis in two separate buckets for covered and non-covered.

Usually the gain on the non-covered is much higher and the basis tiny, so if you let them automatically pick, your LTCG may be much higher than expected. You can call and ask them to manually sell the covered shares instead of the default non-covered first.

 

[lawman]

Covered means that TRPrice is tracking the cost basis of those shares and will report the sales proceeds and cost basis to the IRS if you sell.

I don't understand..I thought that was done for everything.

 

[pb4uski]

No, if you have some really old purchase lots the brokers were not required to track basis.

For tax-reporting purposes, the difference between covered and noncovered shares is this: For covered shares, we're required to report cost basis to both you and the IRS. For noncovered shares, the cost basis reporting is sent only to you. You are responsible for reporting the sale of noncovered shares.

 

[PaunchyPirate]

I don't understand..I thought that was done for everything.

Prior to January 1, 2011, brokerages were not REQUIRED to track and report cost basis data to the IRS. Most of them tracked it and reported it to their clients, but not the IRS.

At that time, it was up to the tax payer to accurately report their cost basis to the IRS on their tax forms.

After that date, the brokerages now need to send the cost basis for sell transactions that involve shares they have tracked since January 1, 2011 to the IRS so that it can be reconciled to what the taxpayer reports on their taxes (which the taxpayer still must do). They are not required to send this info for shares purchased prior to 2011.

Tax lots purchased prior to January 1, 2011 are considered "Noncovered" and those after that date are considered "Covered". You can see how these are treated on your 1099-B if you sell shares from either/or of these categories and you can see how that transfers to on your 1040 Schedule D when it refers to data from your 8949 forms with "Boxes A, B, C, D, E... checked". These letters refer to the various categories of short term covered, short term non covered, long term covered, long term non covered, etc. (not necessarily in that order).

 

[marko]

You need to be careful with TRP and non-covered shares.

If you have both covered and non-covered in a fund, they will automatically sell the non-covered shares first and they compute the basis in two separate buckets for covered and non-covered.

Usually the gain on the non-covered is much higher and the basis tiny, so if you let them automatically pick, your LTCG may be much higher than expected. You can call and ask them to manually sell the covered shares instead of the default non-covered first.

Thanks. The entire balance shows as covered. Now that I know what it means, I'd assume a non covered balance would show in the non covered column.

 

[marko]

And to finish up: A $3000 tax credit/loss would net one a $600 benefit if in the 20% bracket. Correct?
Unless that $3000 dropped me into a better bracket.

 

[Graybeard]

I've been following all the great threads on buying bonds, interest rates, TLH and I understand a lot more about these things than before but it is still complex and somewhat confusing at times. This link explains a lot fairly well.
https://www.investopedia.com/articles/personal-finance/100515/heres-how-deduct-your-stock-losses-your-tax-bill.asp

BTW, this is never really clearly explained in most articles, it's discussed but vaguely IMO. You can offset cap losses with cap gains up to any amount. So if you had $25000 in cap gains and $35000 in cap losses, you can offset all $25000 of those cap gains. Now you still have $10000 of cap losses and you can use another $3000 of them to offset income (pay check, pension, SS, I think but not 100% sure RMD as well) leaving $7k of cap losses to use next year.

 

[RunningBum]

BTW, this is never really clearly explained in most articles, it's discussed but vaguely IMO. You can offset cap losses with cap gains up to any amount. So if you had $25000 in cap gains and $35000 in cap losses, you can offset all $25000 of those cap gains. Now you still have $10000 of cap losses and you can use another $3000 of them to offset income (pay check, pension, SS, I think but not 100% sure RMD as well) leaving $7k of cap losses to use next year.

This looks right, but the use of the word "can" makes it look optional; it is not. If you have a capital loss, you must use it to offset a gain, and then $3K in ordinary income. You can't choose to defer your capital loss because your income is low enough that your LT cap gains aren't taxed or for any other reason.

 

[marko]

https://www.investopedia.com/articles/personal-finance/100515/heres-how-deduct-your-stock-losses-your-tax-bill.asp

BTW, this is never really clearly explained in most articles, it's discussed but vaguely IMO. You can offset cap losses with cap gains up to any amount. So if you had $25000 in cap gains and $35000 in cap losses, you can offset all $25000 of those cap gains. Now you still have $10000 of cap losses and you can use another $3000 of them to offset income (pay check, pension, SS, I think but not 100% sure RMD as well) leaving $7k of cap losses to use next year.

Thanks!! I agree that it is never explained well. This is the most clear, concise explanation I've seen in a long time.

 

[marko]

This looks right, but the use of the word "can" makes it look optional; it is not. If you have a capital loss, you must use it to offset a gain, and then $3K in ordinary income. You can't choose to defer your capital loss because your income is low enough that your LT cap gains aren't taxed or for any other reason.

But the offset is in the order of 1) capital gain and then 2) income. Correct? Can I assume that tax software does this automatically? And if you had zero cap gains, only $3k would go toward income and the balance would be held for the next year?

 

[Dash man]

But the offset is in the order of 1) capital gain and then 2) income. Correct? Can I assume that tax software does this automatically? And if you had zero cap gains, only $3k would go toward income and the balance would be held for the next year?

Correct

 

[Graybeard]

I didn't mean to infer that it is an option when using a cap loss to offset a cap gain by using the word "can". I was just explaining how it works and sometimes the wording can be confusing. I found this TLH very confusing because just about everywhere I read about it the wording was sloppy. I had no idea that you could use way more than $3k of cap losses to offset cap gains, I thought it was a $3k limit per year. That $3k limit applies to income which is not really clearly explained but if you understand it I can see how the writer thinks it is explained. My comments apply to websites that are explaining TLH not about anyone here who has posted about TLH.

Also the TLH rule isn't clearly explained. I thought you just had to wait 30 days to buy back the sold investment. You really have to not be putting any money into the investment (your contributions, reinvesting dividends or cap gains) for 61 days to be able to TLH and then at day 61 you can reinvest back into it, 30 days before the sale, the day of the sale and then 30 days after the sale.

 

[Dash man]

I didn't mean to infer that it is an option when using a cap loss to offset a cap gain by using the word "can". I was just explaining how it works and sometimes the wording can be confusing. I found this TLH very confusing because just about everywhere I read about it the wording was sloppy. I had no idea that you could use way more than $3k of cap losses to offset cap gains, I thought it was a $3k limit per year. That $3k limit applies to income which is not really clearly explained but if you understand it I can see how the writer thinks it is explained. My comments apply to websites that are explaining TLH not about anyone here who has posted about TLH.



Also the TLH rule isn't clearly explained. I thought you just had to wait 30 days to buy back the sold investment. You really have to not be putting any money into the investment (your contributions, reinvesting dividends or cap gains) for 61 days to be able to TLH and then at day 61 you can reinvest back into it, 30 days before the sale, the day of the sale and then 30 days after the sale.

You got it! I’m waiting anxiously to take advantage of TLH with the recent bear market, but need to wait another two weeks before I can sell. I had acquired some stocks from cash covered puts at the end of April.

 

[joesxm3]

And remember the 30 day limitations apply across accounts, even across brokerages.

 

[RunningBum]

But the offset is in the order of 1) capital gain and then 2) income. Correct? Can I assume that tax software does this automatically? And if you had zero cap gains, only $3k would go toward income and the balance would be held for the next year?

Yes, that's the order I stated them in. And yes to your other questions though I only know for sure about TurboTax.