How to use Tax-Loss Harvesting?

[marko]

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

Great! Thanks.

 

[SecondCor521]

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.

One must use a loss. But $3K of loss is not always used up. One of my kids had a loss that remained intact for about a decade because it wasn't usable. See the Capital Loss Carryover Worksheet in the Schedule D instructions for details.

 

[marko]

One must use a loss. But $3K of loss is not always used up. One of my kids had a loss that remained intact for about a decade because it wasn't usable. See the Capital Loss Carryover Worksheet in the Schedule D instructions for details.

My eyes glaze over when I try to read an IRS instruction. Do you mean that a balance of $2800 or so isn't usable? How is the loss not usable?

 

[RunningBum]

One must use a loss. But $3K of loss is not always used up. One of my kids had a loss that remained intact for about a decade because it wasn't usable. See the Capital Loss Carryover Worksheet in the Schedule D instructions for details.

Is that to avoid making taxable income for the current year less than 0?

 

[COcheesehead]

My eyes glaze over when I try to read an IRS instruction. Do you mean that a balance of $2800 or so isn't usable? How is the loss not usable?

As stated earlier, losses are applied against gains, then $3000 against income, then any left over carries over into future years under the same guidelines, losses against gains, then $3000 against income until depleted.

I used tax losses from 2008 all the way to 2016.

 

[SecondCor521]

Is that to avoid making taxable income for the current year less than 0?

I'm not 100% sure. I don't think so because if taxable income is less than zero it just gets set to zero at that point of the 1040.

The situation with my kid I alluded to in the previous post was that they had a capital loss when they were like 7 years old (swapping out some college investments IIRC), but then were a normal kid and had a little bit of income but not enough to exceed the standard deduction (even as a dependent).

In their scenario, since their AGI with or without the capital loss meant that their tax liability was $0 in either case, the way the Capital Loss Carryover Worksheet worked was that the capital loss from when they were 7 got carried forward unused. Eventually it started making a difference to their taxes and got used up at that time (when they started college or so and had jobs of modest significance).

It is a bit odd though - in those intervening years you actually do end up putting a -$3K entry on the capital gain/loss line of the 1040, but the carry forward loss doesn't actually get used up.

Again, if you look at the worksheet - it's only about 15 lines long - and play with some imaginary teenage kid examples, you can see how it works.

(If you're asking the deeper question of why does it work that way, of course the answer is I don't know, ask Congress.)