Brokerage Acct. - Understanding Cost Basis, Tax Loss and Gain Harvesting

[G-Man]

I plan to sell some shares in my brokerage account in the coming month. As of yesterday’s closing, I have a long-term capital gain of $7,603 dollars. My cost basis is around $50k.

I have a carryover capital loss from 2024 to 2025 of $4,357. I want to sell about $4000 worth of stock in the coming months. It looks like at Fidelity; I can pick and choose which lots to sell. All the lots that have a capital loss equal to $1900.

Maybe I’m overthinking this. Should I first sell all the lots that has a capital gain equal to the carryover loss of $4357? That way I pay $0 in capital gain for 2025.

Should I sell all the lots with a capital loss first in combination with some capital gain lots that equal to my target proceeds of $4000? Not sure if this scenario will create additional capital losses or not.

Once again, I’m I overthinking this or is there another method/scenario I should be thinking of?

In addition, what happens to my cost basis after the sell? Has anyone used the feature at Fidelity to sell specific lots?

Here is a video that got me thinking about selling specific lots to achieve tax loss harvesting.

 

[target2019]

I sell specific lots at Schwab to achieve the same end. TLH is a no-brainer. But I'm thinking you can only use $3,000 of the carryover loss each year.

Edit for Ref: Capital Loss Carryover: Definition, Rules, and Example

 

[VanWinkle]

I'm not sure there is a "right" way to balance losses and gains. If I could raise the 4000 without giving up my prior tax loss(it can be used to offset 3000 of ordinary income) I would take advantage of the better result. Otherwise, I would choose the lots with the least capital gains to raise the 4000. If you have other capital losses, you could sell them to offset the gains. Make sure you have dividend reinvestment shut off in both taxable and deferred accounts prior to loss harvesting.

 

[VanWinkle]

I sell specific lots at Schwab to achieve the same end. TLH is a no-brainer. But I'm thinking you can only use $3,000 of the carryover loss each year.

Edit for Ref: Capital Loss Carryover: Definition, Rules, and Example

No limit of the use of carry over losses against gains- 3000 limit is against ordinary income.

 

[FLSUnFIRE]

I sell specific lots at Schwab to achieve the same end. TLH is a no-brainer. But I'm thinking you can only use $3,000 of the carryover loss each year.

Edit for Ref: Capital Loss Carryover: Definition, Rules, and Example

$3K is the limit against regular income, capital losses can always be used to offset capital gains without limit.

Given the different tax rates the offset against regular income is usually more lucrative for the tax payer.

 

[VanWinkle]

$3K is the limit against regular income, capital losses can always be used to offset capital gains without limit.

Given the different tax rates the offset against regular income is usually more lucrative for the tax payer.

We caught that at the same time!! Brilliant minds think alike.

 

[G-Man]

Ok. So, what would be the most tax efficient way of approaching this scenario if there is one?

 

[engineernerd]

Ok. So, what would be the most tax efficient way of approaching this scenario if there is one?

I haven't been in the same situation yet, but assuming you will have at least $3,000 in ordinary income and that your marginal tax rate for ordinary income will be higher than your capital-gains tax rate, what makes sense to me is to harvest only $1,357 worth of gains so you can apply the remainder to your ordinary income.

Of course, if your total income will be below the threshold for the zero capital gains rate to apply, and you have substantial capital gains in taxable accounts, that might override the above calculation.

 

[G-Man]

I haven't been in the same situation yet, but assuming you will have at least $3,000 in ordinary income and that your marginal tax rate for ordinary income will be higher than your capital-gains tax rate, what makes sense to me is to harvest only $1,357 worth of gains so you can apply the remainder to your ordinary income.

Of course, if your total income will be below the threshold for the zero capital gains rate to apply, and you have substantial capital gains in taxable accounts, that might override the above calculation.

I will be in the 22% marginal tax bracket.

 

[engineernerd]

I will be in the 22% marginal tax bracket.

I suppose if you have a lot of unrealized capital gains in taxable accounts it still COULD make sense to harvest capital gains at 15%, but you'd need your crystal ball to figure that out (if the government in future cancels the favorable tax rates on capital gains, for example - highly unlikely IMHO).

 

[pb4uski]

Yeah, you're overthinking it, but we're used to that.

 

[FLSUnFIRE]

Ok. So, what would be the most tax efficient way of approaching this scenario if there is one?

Most optimal would defer realizing capital gains until depleting the carry-over loss so it could be written off from regular income (At $3K/year). May or may not be doable.

If you have more unrealized capital gains, you could realize capital gains up to the top of your 0% bracket plus your losses to bring you back to 0%. You could then repurchase (to stay invested) those gains you do not need for spending (no wash sale rule on gains) and have a stepped up basis on them in the future.

 

[MTB4me]

A word of caution if you plan to sell specific lots on Fidelity. Be sure to check your lots post-sale to make sure Fido actually sold and recorded the right lots. They messed mine up last year. I had specifically selected lots to show a cumulative loss, but ended up with a $20K capital gain instead as Fido recorded the wrong lots. It’s still messed up after trying to get it corrected with my client team (I’m self-directed, but have enough assets to be in the private client group, or whatever it’s called these days). May end up just stuck with the result.

 

[G-Man]

A word of caution if you plan to sell specific lots on Fidelity. Be sure to check your lots post-sale to make sure Fido actually sold and recorded the right lots. They messed mine up last year. I had specifically selected lots to show a cumulative loss, but ended up with a $20K capital gain instead as Fido recorded the wrong lots. It’s still messed up after trying to get it corrected with my client team (I’m self-directed, but have enough assets to be in the private client group, or whatever it’s called these days). May end up just stuck with the result.

Thanks for providing your experience with selling lots at Fidelity. I will definitely triple check after the sell.

 

[VanWinkle]

Yeah, you're overthinking it, but we're used to that.

You can do better than this reply, as many here seek your knowledge, but not your approval.

 

[RunningBum]

Ok. So, what would be the most tax efficient way of approaching this scenario if there is one?

Sell the losers first, highest losses prioritized. Personally I would sell all losers (as long as you can avoid a wash sale) whether or not you need the cash. You can invest the cash you don't need in other funds. Then sell the smallest gainers if you still want to sell more. The main theory on this is that the capital loss is best used $3K a year as a reduction to regular income. This gets you a 22% tax reduction rather than 15% reduction against capital gains.

If you had low enough income to take 0% cap gains the strategy might be different. You might want to use up the cap loss carryover and then sell more to fill up the 0% cap gains space. However, I fill up that income space with Roth conversions.

 

[audreyh1]

A word of caution if you plan to sell specific lots on Fidelity. Be sure to check your lots post-sale to make sure Fido actually sold and recorded the right lots. They messed mine up last year. I had specifically selected lots to show a cumulative loss, but ended up with a $20K capital gain instead as Fido recorded the wrong lots. It’s still messed up after trying to get it corrected with my client team (I’m self-directed, but have enough assets to be in the private client group, or whatever it’s called these days). May end up just stuck with the result.

That’s interesting.

I’ve done specific lot selling online at Fidelity and never had a problem, but I do know to check!

 

[pb4uski]

Thanks for providing your experience with selling lots at Fidelity. I will definitely triple check after the sell.

Sounds like it would be prudent to take a screenshot just before you sell.

 

[pb4uski]

You can do better than this reply, as many here seek your knowledge, but not your approval.

You were on the right track and were getting good advice from others so anything more that I added would have been redundant.

 

[Gotadimple]

I see a problem here, specifically as it relates to your question about what happens to your cost basis after you make a sale. You should be recording buys and sells by lot and harvesting gains/losses by lot - and reducing the total value of your cost basis by the original value of the shares you sold. That means you should be keeping records separate from the broker's records (a spreadsheet is helpful).

Your intro says you know your cost basis and you know your current gain in the aggregate.. Gains/Losses are important when deciding to buy more or sell but most important to take advantage of taxation.

You also sold something last year and incurred a capital loss that can be carried forward from last year's taxes. The carryforward can be applied generally against any gains on Schedule D, plus applied to other ordinary income up to a total limit of $3000 each year.

So what is the original cost of the $4000 you want to sell this year? Which lots? The calculation for Schedule D looks like

Sale Proceeds ($4000) - Cost Basis ($) = net gain or loss for all lots involved. Then apply $3000 of the $4700 carryover.

See Schedule D Part II for instructions.

 

[audreyh1]

Sounds like it would be prudent to take a screenshot just before you sell.

I actually do that - print exactly what I have selected.

And the confirmation should also show the selected lots.

 

[pb4uski]

I see a problem here, specifically as it relates to your question about what happens to your cost basis after you make a sale. You should be recording buys and sells by lot and harvesting gains/losses by lot - and reducing the total value of your cost basis by the value of the shares you sold. That means you should be keeping records separate from the broker's records (a spreadsheet is helpful). ...

What you wrote doesn't sound correct. You reduce your total cost basis by the cost basis of the shares sold, NOT the value of the shares sold. I suspect that you know that and just fumbled the wording but I didn't want any other readers to take you literally.

Other than verifying that the broker sold the lots that you specified when you do sales, I don't see any need to keep cost basis records separate from the broker's records. Besides, when you sell the broker is going to report the sales vallue and cost basis to the IRS based on their records and if you think it should be different you will have an uphill battle to prove it.

Luckily, I do keep track of cost basis in Quicken, but I usually go by what the broker reports to the IRS unless it is totally wrong (and it never has been though there have been minor differences)... path of least resistance.

 

[Gotadimple]

What you wrote doesn't sound correct. You reduce your total cost basis by the cost basis of the shares sold, NOT the value of the shares sold. I suspect that you know that and just fumbled the wording but I didn't want any other readers to take you literally.

You are correct PB4uski. I meant to reduce the total cost basis by the original cost value of the shares sold. I've corrected my post.