Quick Tax-Loss Harvesting Question

[Amethyst]

I'm dipping my toe into tax-loss harvesting for the first time this year, and wanted to check with you all about something. Investopedia says the following:

"In any given year, there is no limit on the amount of capital losses that can offset capital gains. However, only a maximum of $3,000 net loss can be deducted from ordinary income; any excess loss may be carried forward into future tax years."

I interpret this to mean that if I have a long-term capital loss of $6,000 in 2009, I can set $3,000 of that loss against our 2009 personal income. The next $3,000 can go against any 2009 long-term capital gains (if any), and any remaining capital gains will carry forward to be set against 2010 long-term capital gains.

Just wanted to be sure that it's OK to set losses against both LTGC and personal income in the same year.

Thanks,

Amethyst

 

[LOL!]

All realized losses will net out against any realized gains you have for the year. If you have more losses than gains, then the first $3000 of those net losses will serve as deduction against ordinary income (i.e. non-cap-gains income). If you still have net losses after subtracting that $3000, you get to carry them over to next year where it all repeats.

You really have no choice how the losses are used. First, they are used against cap gains. If no cap gains, then to the next step where up to $3K is used against ordinary income, then carryover to next year.

So what you wrote is backwards. Not first against ordinary income, then cap gains. It's first against cap gains, then ordinary income. And maybe you had a typo in that net cap losses are carried forward, not cap gains.

 

[kaneohe]

LOL! is correct. Perhaps examining Sch D will help:
http://www.irs.gov/pub/irs-pdf/f1040sd.pdf

Short term gains/losses are combined in Pt 1; long term gains/losses are combined in Pt 2; the combination of net short & long gains/losses is in line 16 and assuming that is a loss, line 21 will calculate the amount of loss to be used against ordinary income. Any loss not used in the current year will be carried over to future yrs.

 

[Amethyst]

Friends, thanks for setting me straight on the "order of things." Cheers, A.