Tax loss harvesting

[lawman]

I sold a bond fund earlier this year at a $40,000.00 loss. Before yesterday I had not sold anything for a gain. Thinking I could take advantage of the loss by selling an equity mutual fund that had a gain I sold enough of that fund to reduce that capital loss to $12,000.00..After sleeping on it I just don't see how that helped me. How is that going to lower my tax? In fact, it seems to me like it hurt me since it left me with $28,000.00 less that I can carry over in future years to offset ordinary income..What am I missing?

 

[VanWinkle]

I sold a bond fund earlier this year at a $40,000.00 loss. Before yesterday I had not sold anything for a gain. Thinking I could take advantage of the loss by selling an equity mutual fund that had a gain I sold enough of that fund to reduce that capital loss to $12,000.00..After sleeping on it I just don't see how that helped me. How is that going to lower my tax? In fact, it seems to me like it hurt me since it left me with $28,000.00 less that I can carry over in future years to offset ordinary income..What am I missing?

It all depends on your tax brkt as to whether it was the right decision.
If you wouldn't have paid on a capital gain due to your brkt, then saving the loss for the 3000 per year ded on ordinary income makes sense.

 

[euro]

Not really enough info to comment on your specific case but in general, it is never a good idea to let the tax tail wag the dog. If you were planning on selling that mutual fund anyway (poor performer, say) then fine, but to sell something just to use up a banked capital loss - not generally a good plan. Just use it up against regular earnings in $3000 increments.

 

[lawman]

Not really enough info to comment on your specific case but in general, it is never a good idea to let the tax tail wag the dog. If you were planning on selling that mutual fund anyway (poor performer, say) then fine, but to sell something just to use up a banked capital loss - not generally a good plan. Just use it up against regular earnings in $3000 increments.

I goofed up again..I suppose it does raise the basis on shares I reinvest in so that should I sell those in the future I would have less gain to pay tax on but since I never plan to sell it I think it was a mistake.. Now I think I'll just hold the cash and hopefully be able to re buy those shares at a lower cost than I sold..

 

[COcheesehead]

The whole premise behind tax loss harvesting is to lock in the loss and then turn around and reinvest the money in something close, but different. So you are not out of the market.
The loss can then be used to offset any gain and $3000 a year can be used to offset income.
Use a tool like Dinkytown to see how your 1040 will turn out. That is the only way you’ll truly understand what the tax loss did and what opportunities you have as the result.
I used my tax loss to get out of a dividend ETF in my taxable account which will reduce my taxes going forward or at least allow me to increase income from other sources without tax ramifications. Taxes are an important part of investing. They should not be ignored, because it’s what you are left with after taxes that matters.

 

[lawman]

The loss can then be used to offset any gain and $3000 a year can be used to offset income.
.

That's where I screwed up...I have little to no realized gain..

 

[COcheesehead]

That's where I screwed up...I have little to no realized gain..

But it carries forward until used up. I milked tax losses for almost 8 years from 2008.

 

[lawman]

But it carries forward until used up. I milked tax losses for almost 8 years from 2008.

That's why I should have just let it ride..What I did was sold an equity fund that I had a large gain in and used up $28,000.00 worth of loss. Now I have less to carry forward and since I had no gain before all I did was raise my basis for a replacement fund..Seems to me like selling saved me zero taxes since the only gain I offset was the equity fund that I sold..Am I missing something?

 

[SecondCor521]

That's why I should have just let it ride..What I did was sold an equity fund that I had a large gain in and used up $28,000.00 worth of loss. Now I have less to carry forward and since I had no gain before all I did was raise my basis for a replacement fund..Seems to me like selling saved me zero taxes since the only gain I offset was the equity fund that I sold..Am I missing something?

Well, it depends.

You got to realize $28,000 of capital gain at zero tax. Had you sold those shares without the offsetting capital loss, you would have paid anywhere between 0% to 15% to 20% to 23.8% tax on that $28,000 of gain. So you avoided somewhere between $0 (0% times $28,000) and $6,664 (23.8% of $28,000) in federal taxes.

If you never would have sold those shares, they would generally get a step up in basis at your death and your beneficiaries could sell at a stepped up basis and LT rates (inherited shares generally get LT treatment regardless of holding period).

Your realized capital loss that you were offsetting could have been used against ordinary income at $3K per year, which would reduce your taxes at whatever marginal rate you would have been at each year. This is better in the sense that your marginal ordinary income rate is higher than the capital gains rates. But it's worse in two other ways: at $3K per year, you'd have to wait about 13 tax years to realize the full benefit, and money does have a time value. Second, you mentioned in your other thread that you're an older person; when you die, your carry forward loss dies with you and your beneficiaries can't use it. (Although because of the step up in basis above, this usually isn't a big deal.)

 

[COcheesehead]

That's why I should have just let it ride..What I did was sold an equity fund that I had a large gain in and used up $28,000.00 worth of loss. Now I have less to carry forward and since I had no gain before all I did was raise my basis for a replacement fund..Seems to me like selling saved me zero taxes since the only gain I offset was the equity fund that I sold..Am I missing something?

Some folks do what is called gain harvesting, taking gains at advantageous times, which is what you did.

 

[FANOFJESUS]

I don't think it was a mistake. Taxes will be a lot higher in the future going by the national debt. If it was a mistake only a baby one.

 

[lawman]

I don't think it was a mistake. Taxes will be a lot higher in the future going by the national debt. If it was a mistake only a baby one.

Please help me to understand your logic..It would make me feel a LOT better
I had no capital gains..I had $40,000.00 in capital loss. I sold something that cancelled a big chunk of my loss. I will buy it right back..That saved me zero dollars in tax and now I have less to carryover..What am I missing?

 

[SecondCor521]

What am I missing?

Did you read my post #9 in this thread? I thought I answered your question.

 

[lawman]

Did you read my post #9 in this thread? I thought I answered your question.

I guess I missed it but having read it several times now it's just what I thought. If I had it to do over I would not do it. I guess the only way it will help me now is if I use those proceeds to buy another fund and later sell that fund for profit my cost basis for the new fund will be higher resulting in a lower capital gain than I would have otherwise realized. Do you agree?

 

[SecondCor521]

I guess I missed it but having read it several times now it's just what I thought. If I had it to do over I would not do it. I guess the only way it will help me now is if I use those proceeds to buy another fund and later sell that fund for profit my cost basis for the new fund will be higher resulting in a lower capital gain than I would have otherwise realized. Do you agree?

No, I do not agree. To be as concise and simple as possible, your $28K of capital gains that you mention in your OP were completely tax free. That is a benefit to you regardless of anything else.

...


(They may have ended up being tax free anyway, and there may have been a better use of the $40K capital loss, but the $28K of tax free income is definitely a benefit.)

...

(Also, if you buy another fund now and sell it later, that is generally an entirely separate matter from this $28K CG sale. That future sale could use up some of your remaining $12K capital loss, but again, that is a separate matter from the $28K CG sale using up $28K of your existing $40K capital loss.)

 

[VanWinkle]

I goofed up again..I suppose it does raise the basis on shares I reinvest in so that should I sell those in the future I would have less gain to pay tax on but since I never plan to sell it I think it was a mistake.. Now I think I'll just hold the cash and hopefully be able to re buy those shares at a lower cost than I sold..

Timing the market works....every now and then... but most of the time it does not.

 

[Montecfo]

When I was working, I would take some ordinary losses, and fund my charities with LTCG securities.

Using that strategy I often had no taxable gains but 3000 loss to go against ordinary income.

As a retiree it is a bit different, as I use some of my LTCG securities for living expenses at 0% and try not to recognize losses in the same year.