Transferring a capital loss to your partner

Sandy & Shirley

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My partner was able to complete her Roth Conversions in 2024 so we are starting a standard brokerage LTCG Harvesting account for her.

I am still working on the completion of my Roth Conversions. At the start of each year I will do the maximum amount of Conversions within my 12% tax bracket / 22.2% Marginal Tax Rate. My goal is to avoid the 22% tax bracket which is a 40.7% Tax Rate with the 85 cent per dollar taxation of my SSB.

As we make investments in her brokerage account, if one of those investments becomes a Capital loss:

Can she transfer that investment to my brokerage account?

Can I then sell that investment to claim the capital loss?

Can I then do another Roth Conversion within my 12% tax bracket?
 
Are you married to your partner? If not, then gifting rules apply when calculating the basis. When someone gives you stock as a gift and you sell it, your basis is generally the lesser of the fair market value on the date of the gift or the donor's basis. If the value increases after you receive the gift, but not to the point of the donor's basis, then there is no gain or loss. The practical effect of this is that you can't transfer a loss to a non-spouse.

See here for details: Property (Basis, Sale of Home, etc.) | Internal Revenue Service
 
If you buy the shares from your partner at whatever price you two agree upon, call it $X, then later sell those shares to someone else at $X - $Y, voila, you have a $Y loss. Be sure to document the agreement at $X price.
 
If you buy the shares from your partner at whatever price you two agree upon, call it $X, then later sell those shares to someone else at $X - $Y, voila, you have a $Y loss. Be sure to document the agreement at $X price.
Great theory, but how do you sell say 100 shares of Microsoft to your friend ? Unless you have paper shares in hand, I can't see how it works.
 
If you buy the shares from your partner at whatever price you two agree upon, call it $X, then later sell those shares to someone else at $X - $Y, voila, you have a $Y loss. Be sure to document the agreement at $X price.

Creative idea, but it doesn't work that way.

As cathy63 rightly points out, it's the FMV or cost basis of the shares that matters, not the "agreed upon" price. If you "buy" shares at $X and $X is different from FMV, then the IRS will treat the difference as a gift, because that's what it is. Who gifted who will depend on whether $X is greater or less than FMV.

Sure, you can gift your partner stuff, including shares of MSFT or whatever. But you can't generate a capital loss out of thin air by gifting in this way.
 
We are not concerned about the size of the “gift”, we are concerned about the size of the capital gain or loss when the receiving party sells the shares.



Buy XYZ for $5,000 and transfer it to your partner 18 months later when it is worth $7,000. It was our understanding that when your partner sells the shares they will have to claim a LTCG of $2,000.



But now I’m getting the idea that if you buy XYZ for $5,000 and transfer it to your partner when it is only worth $4,500, then your partner sells it a month later for only $4,300; your partner can only claim a $200 capital loss, not the full $700 capital loss.



Is that the law?
 
Since one could get paper shares, I'd make my own substitute document as part of the sales agreement. Something like "This paper represents the ___ company shares, ticker symbol ___, in the quantity ____ sold on date ___ by seller____ to buyer ____ for the amount of $X." When those shares are later sold to someone else, the proceeds and tax liability should go to the buyer in agreement above. When filing taxes, apply adjustments to the broker-reported purchase and sales prices so as to make those amounts match the agreement. I'm not an attorney or broker, but as long as the shares exist, $X is actually paid by the buyer, and any taxes due are paid on the sales, etc. I would expect such a document to suffice.
 
We are not concerned about the size of the “gift”, we are concerned about the size of the capital gain or loss when the receiving party sells the shares.

Understood. I only brought up gifting because of the side conversation with GrayHare.

Buy XYZ for $5,000 and transfer it to your partner 18 months later when it is worth $7,000. It was our understanding that when your partner sells the shares they will have to claim a LTCG of $2,000.

Correct.

But now I’m getting the idea that if you buy XYZ for $5,000 and transfer it to your partner when it is only worth $4,500, then your partner sells it a month later for only $4,300; your partner can only claim a $200 capital loss, not the full $700 capital loss.

Also correct. The tax law treats gifts of stock differently depending on whether the FMV is greater or less than the basis at the time of the transfer.

Is that the law?

Yup. Title 26, United States Code. cathy63's link in her first reply points you to the IRS website where an accurate layman's description of the law is presented.

Since one could get paper shares, I'd make my own substitute document as part of the sales agreement. Something like "This paper represents the ___ company shares, ticker symbol ___, in the quantity ____ sold on date ___ by seller____ to buyer ____ for the amount of $X." When those shares are later sold to someone else, the proceeds and tax liability should go to the buyer in agreement above. When filing taxes, apply adjustments to the broker-reported purchase and sales prices so as to make those amounts match the agreement. I'm not an attorney or broker, but as long as the shares exist, $X is actually paid by the buyer, and any taxes due are paid on the sales, etc. I would expect such a document to suffice.

On of the things that is required for a contract to be valid is that it has to be lawful. Your sales agreement directly violates the tax code, which is part of federal law. So your sales agreement is not a valid contract. Ergo, it is useless for your attempted purpose.

Yes, the proceeds and tax liability would still transfer to the buyer, but they would transfer as described in tax law, not as described in an invalid contract.
 
True, my idea won't work if the IRS recategorizes such share sales as gifts. Good discussion, though.
 

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