Originally Posted by Beer man
I've been thinking of converting some of my small cap index funds and S&P 500 index fund into a total stock market index fund to harvest the capital loss. But as I understand it in the future(when I sell shares at a price that i hope is higher than what I initially paid) I would owe more capital gains tax than if I simply held on to what i own now. Doesn't this place me at risk that cap gains rate may increase in the future? The last few months have significantly increased the time to ER for me. I am very comfortable with the buy and hold philosophy. If selling now would increase my future cap gains liability I would rather just hold on now. I'd appreciate any thoughts.
Yes, by decreasing your "basis" (the price you paid for the stock), you'l be increasing the amount of cap gains that is subject to taxes when you sell the stock. The impact of this move will be increased if the cap gains tax rate increases (as it seems is likely to happen).
Possibly offsetting impacts (that is, reasons you still might want to consider doing the tax loss harvesting):
- It may reduce the amount of income tax you have to pay this year. The losses can be used t offset any cap gains you might have, then up to $3000 can be used against ordinary income. You can carry forward any remainder to use in future years. Thus, if you are in the 25% marginal tax bracket, that deduction will reduce your taxes by $750. That's $750 you can use to buy more equities while their prices are beaten down. The future gain on this investment might make it worth paying taxes on the decreased basis in the future.
- If it's likely your marginal tax rate will go up in the future (maybe you've been adding up the cost of the govt bailouts and all the "free" goodies that have been promised to everyone), those $3000/year carry-forward deductions might have more vale than they would today.
- Similarly, if your income tax rate is going to be lower hen you sell these stocks (e.g. maybe you have ERed and now making less money), then the decreased basis on your investment won't be such a big deal.
Nothing's certain. I'm probably going to do some tax loss harvesting on my solo 401K account this week, and faced the same issues. Good luck!