Which is the smartest lot to pull from?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
iamblessed
Posts: 1808
Joined: Sat Jun 09, 2018 11:52 am
Location: St. Louis

Which is the smartest lot to pull from?

Post by iamblessed »

I am retired and have a 88/12 stock cash barbell. I plan to pull from stocks as long as they are in the black. When they go in the red I will pull from cash. My mutual fund lots look like this
1. Up a lot
2. Up a little
3. Down a little
4. Down a lot

Which lot is the smartest lot to pull from 1-4
I am guessing number 2 but I don't know.
Last edited by iamblessed on Wed Jan 26, 2022 10:22 am, edited 1 time in total.
livesoft
Posts: 86079
Joined: Thu Mar 01, 2007 7:00 pm

Re: Which is the smartest lot to pull from?

Post by livesoft »

Down a lot. Sell all losers first. You can use your cash to buy something to replace the shares sold at a loss*. It might look like you used cash instead, but you would get a tax break if the loser shares were in a taxable account.

And actually, if these are in a taxable account, then you should tax-loss harvest all the losers and have only things with gains.

*If in a taxable account, the replacement shares should be something substantially similar, but not substantially identical.
Last edited by livesoft on Wed Jan 26, 2022 7:05 am, edited 1 time in total.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
iamblessed
Posts: 1808
Joined: Sat Jun 09, 2018 11:52 am
Location: St. Louis

Re: Which is the smartest lot to pull from?

Post by iamblessed »

livesoft wrote: Wed Jan 26, 2022 7:02 am Down a lot. Sell all losers first. You can use your cash to buy something to replace the shares sold at a loss*. It might look like you used cash instead, but you would get a tax break if the loser shares were in a taxable account.

*If in a taxable account, the replacement shares should be something substantially similar, but not substantially identical.
It will be for spending money and I am in the 12% tax bracket.
livesoft
Posts: 86079
Joined: Thu Mar 01, 2007 7:00 pm

Re: Which is the smartest lot to pull from?

Post by livesoft »

iamblessed wrote: Wed Jan 26, 2022 7:04 amIt will be for spending money and I am in the 12% tax bracket.
I am in the 12% (or less) tax bracket and retired. I am selling the shares with the least gain. I sell losers first, since with a negative gain, the losers are definitely the least gain. If I mess up my allocation by doing so, then I exchange from fixed income funds in my tax-advantaged accounts into substantially similar, but not substantially identical shares to the shares I sold for a loss for spending money in my taxable account.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
iamblessed
Posts: 1808
Joined: Sat Jun 09, 2018 11:52 am
Location: St. Louis

Re: Which is the smartest lot to pull from?

Post by iamblessed »

livesoft wrote: Wed Jan 26, 2022 7:08 am
iamblessed wrote: Wed Jan 26, 2022 7:04 amIt will be for spending money and I am in the 12% tax bracket.
I am in the 12% (or less) tax bracket and retired. I am selling the shares with the least gain. I sell losers first, since with a negative gain, the losers are definitely the least gain. If I mess up my allocation by doing so, then I exchange from fixed income funds in my tax-advantaged accounts into substantially similar, but not substantially identical shares to the shares I sold for a loss for spending money in my taxable account.
The way I look at it if I sell the biggest loser whose losses are gone forever. If I sell the one that is a little up my taxes are low and at least I make a profit. Am I looking at it wrong? I don't have other gains this year. It will be my only sell.
livesoft
Posts: 86079
Joined: Thu Mar 01, 2007 7:00 pm

Re: Which is the smartest lot to pull from?

Post by livesoft »

The way I look at it: I will sell all my losers first. If I still need those shares to complete my asset allocation, then I will replace those shares by buying substantially similar, but not substantially identical shares somehow.

If I have a share of VTSAX worth $220 that was purchased for $200 and a share of VTSAX that is worth the same $220 that I purchased for $240, then I am definitely selling the share purchased at $240. After the sell transaction, then I would have the same number of shares of VTSAX that I would have if I sold the other share. That is, realizing the loss of $20 would not change what I end up with.

However, maybe you are asking about selling VTSAX at a loss while still holding VTIAX at a slight gain? That would change your asset allocation and you would probably want to do something to correct that. In that case, selling the losing shares of VTSAX in a tax-loss harvesting move is still a good thing to do (and buying replacement shares), but you could still sell that VTIAX as well and use your tax-advantaged account to rebalance back to your desire asset allocation. And you can still have your taxable account at 88/12 if you like as well.
Wiki This signature message sponsored by sscritic: Learn to fish.
MrJedi
Posts: 3540
Joined: Wed May 06, 2020 11:42 am

Re: Which is the smartest lot to pull from?

Post by MrJedi »

Biggest loser lot. Why pay tax at all when you can instead get a deduction?
sureshoe
Posts: 2165
Joined: Tue Jan 15, 2019 3:26 pm

Re: Which is the smartest lot to pull from?

Post by sureshoe »

iamblessed wrote: Wed Jan 26, 2022 7:04 am
livesoft wrote: Wed Jan 26, 2022 7:02 am Down a lot. Sell all losers first. You can use your cash to buy something to replace the shares sold at a loss*. It might look like you used cash instead, but you would get a tax break if the loser shares were in a taxable account.

*If in a taxable account, the replacement shares should be something substantially similar, but not substantially identical.
It will be for spending money and I am in the 12% tax bracket.
(I was going to ivesoft's advice)
Really doesn't matter - sell the biggest losers. If you have a real example pull it - but here is my dummy example:

I have $500k in equities with 5 lots.
1) Up $50k
2) Up $10k
3) Even
4) Down $10k
5) Down $50k
I have $100k in cash

Selling lots 1 or 2 still incurs SOME tax.
Sell 5) and 4) incurs no tax. Now you have the flexibility to either reduce current tax bill, queue it up for the future - or you could harvest gains and wipe out all future tax on the current gains.
Topic Author
iamblessed
Posts: 1808
Joined: Sat Jun 09, 2018 11:52 am
Location: St. Louis

Re: Which is the smartest lot to pull from?

Post by iamblessed »

delete
Last edited by iamblessed on Wed Jan 26, 2022 9:39 am, edited 1 time in total.
Topic Author
iamblessed
Posts: 1808
Joined: Sat Jun 09, 2018 11:52 am
Location: St. Louis

Re: Which is the smartest lot to pull from?

Post by iamblessed »

livesoft wrote: Wed Jan 26, 2022 7:35 am The way I look at it: I will sell all my losers first. If I still need those shares to complete my asset allocation, then I will replace those shares by buying substantially similar, but not substantially identical shares somehow.

If I have a share of VTSAX worth $220 that was purchased for $200 and a share of VTSAX that is worth the same $220 that I purchased for $240, then I am definitely selling the share purchased at $240. After the sell transaction, then I would have the same number of shares of VTSAX that I would have if I sold the other share. That is, realizing the loss of $20 would not change what I end up with.

However, maybe you are asking about selling VTSAX at a loss while still holding VTIAX at a slight gain? That would change your asset allocation and you would probably want to do something to correct that. In that case, selling the losing shares of VTSAX in a tax-loss harvesting move is still a good thing to do (and buying replacement shares), but you could still sell that VTIAX as well and use your tax-advantaged account to rebalance back to your desire asset allocation. And you can still have your taxable account at 88/12 if you like as well.
You have more money on the side than me. I am not worried about spending down some each year. Under my plan I do not rebalance unless my cash bucket is down. I just do not want to spend a loser because I will have no more time to wait for him to recover. In a bear they would all be losers and I will be forced into the cash bucket.
mmoneytalks
Posts: 82
Joined: Sun Jan 18, 2015 10:00 am

Re: Which is the smartest lot to pull from?

Post by mmoneytalks »

livesoft wrote: Wed Jan 26, 2022 7:08 am
iamblessed wrote: Wed Jan 26, 2022 7:04 amIt will be for spending money and I am in the 12% tax bracket.
I am in the 12% (or less) tax bracket and retired. I am selling the shares with the least gain. I sell losers first, since with a negative gain, the losers are definitely the least gain. If I mess up my allocation by doing so, then I exchange from fixed income funds in my tax-advantaged accounts into substantially similar, but not substantially identical shares to the shares I sold for a loss for spending money in my taxable account.
livesoft — Would your approach to selling change if these funds were in a Roth?
RiskyStocksPlanB
Posts: 5
Joined: Sat Feb 02, 2019 1:51 pm

Re: Which is the smartest lot to pull from?

Post by RiskyStocksPlanB »

Sell the biggest losers first.

Mental accounting can feel good, but it is counterproductive.

Mental Accounting
User avatar
Ray_McKigney
Posts: 148
Joined: Sun Jul 28, 2019 11:48 am

Re: Which is the smartest lot to pull from?

Post by Ray_McKigney »

iamblessed wrote: Wed Jan 26, 2022 7:13 amThe way I look at it if I sell the biggest loser whose losses are gone forever.
But you're replacing it with something that's highly correlated to your loser, something that might recover in the future just like your loser would.

You get the benefit of paying less in taxes now without really losing anything. And you might be able to avoid or reduce the greater tax bill later.
Master of my domain
pasadena
Posts: 2337
Joined: Sat Jul 02, 2016 1:23 am
Location: PNW

Re: Which is the smartest lot to pull from?

Post by pasadena »

All those shares are the same price when you sell. Whether they're green or red only impacts your taxes - you will still sell the same number of shares.

So sell the ones that cost you less to sell, that is the ones with the bigger loss. Assuming there is no wash sale, then you will pay less taxes on them, and end up with more money.
MrCheapo
Posts: 1469
Joined: Tue Dec 22, 2020 2:43 pm

Re: Which is the smartest lot to pull from?

Post by MrCheapo »

iamblessed wrote: Wed Jan 26, 2022 6:58 am I am retired and have a 88/12 stock cash barbell. I plan to pull from stocks as long as they are in the black. When they go in the red I will pull from cash. My stock lots look like this
1. Up a lot
2. Up a little
3. Down a little
4. Down a lot

Which lot is the smartest lot to pull from 1-4
I am guessing number 2 but I don't know.
Interesting that many people are saying "sell the losers". But maybe they are loser for the next year or so and then blossom. I'm surprised the actual stock itself doesn't come into the play. I held Amazon for a few years and it was a loser until it picked up momentum. Same for NetFlix and most tech stocks.
pasadena
Posts: 2337
Joined: Sat Jul 02, 2016 1:23 am
Location: PNW

Re: Which is the smartest lot to pull from?

Post by pasadena »

MrCheapo wrote: Wed Jan 26, 2022 9:58 am
iamblessed wrote: Wed Jan 26, 2022 6:58 am I am retired and have a 88/12 stock cash barbell. I plan to pull from stocks as long as they are in the black. When they go in the red I will pull from cash. My stock lots look like this
1. Up a lot
2. Up a little
3. Down a little
4. Down a lot

Which lot is the smartest lot to pull from 1-4
I am guessing number 2 but I don't know.
Interesting that many people are saying "sell the losers". But maybe they are loser for the next year or so and then blossom. I'm surprised the actual stock itself doesn't come into the play. I held Amazon for a few years and it was a loser until it picked up momentum. Same for NetFlix and most tech stocks.
I think we're all assuming those are all shares of the same stock (or fund). I know I did. Unless otherwise specified (which it wasn't), we assume "all other things being equal".
Topic Author
iamblessed
Posts: 1808
Joined: Sat Jun 09, 2018 11:52 am
Location: St. Louis

Re: Which is the smartest lot to pull from?

Post by iamblessed »

Ray_McKigney wrote: Wed Jan 26, 2022 9:52 am
iamblessed wrote: Wed Jan 26, 2022 7:13 amThe way I look at it if I sell the biggest loser whose losses are gone forever.
But you're replacing it with something that's highly correlated to your loser, something that might recover in the future just like your loser would.

You get the benefit of paying less in taxes now without really losing anything. And you might be able to avoid or reduce the greater tax bill later.
I am spending the dough. Not replacing it with anything. It is all the same mutual fund.
scophreak
Posts: 502
Joined: Tue Jan 12, 2016 12:17 pm

Re: Which is the smartest lot to pull from?

Post by scophreak »

mmoneytalks wrote: Wed Jan 26, 2022 9:45 am
livesoft wrote: Wed Jan 26, 2022 7:08 am
iamblessed wrote: Wed Jan 26, 2022 7:04 amIt will be for spending money and I am in the 12% tax bracket.
I am in the 12% (or less) tax bracket and retired. I am selling the shares with the least gain. I sell losers first, since with a negative gain, the losers are definitely the least gain. If I mess up my allocation by doing so, then I exchange from fixed income funds in my tax-advantaged accounts into substantially similar, but not substantially identical shares to the shares I sold for a loss for spending money in my taxable account.
livesoft — Would your approach to selling change if these funds were in a Roth?
Of course the approach would be different if you're speaking of shares held in a Roth. In this case, there are no tax consequences to consider (assuming you're talking about a qualified distribution). In a Roth, shares with significant gains are identical to those with significant losses. You have no capital gains/losses, or ordinary income to consider for this type of distribution.
MrJedi
Posts: 3540
Joined: Wed May 06, 2020 11:42 am

Re: Which is the smartest lot to pull from?

Post by MrJedi »

iamblessed wrote: Wed Jan 26, 2022 10:18 am
Ray_McKigney wrote: Wed Jan 26, 2022 9:52 am
iamblessed wrote: Wed Jan 26, 2022 7:13 amThe way I look at it if I sell the biggest loser whose losses are gone forever.
But you're replacing it with something that's highly correlated to your loser, something that might recover in the future just like your loser would.

You get the benefit of paying less in taxes now without really losing anything. And you might be able to avoid or reduce the greater tax bill later.
I am spending the dough. Not replacing it with anything. It is all the same mutual fund.
The loss is not gone forever. It is manifested in the lower cost basis of the shares you keep. Those shares will have higher gains in the future vs selling them now and keeping the current losers. You are effectively deferring the gain to the future. The benefit of this is that you pay less tax today which leaves you with more money to invest between now and the time you sell the other shares.

There may be opportunities to sell or otherwise dispose the winning shares with zero capital gain tax in the future which would be an overall win. For example step up basis upon death, gifting shares to charity, lower tax bracket during retirement, etc.
User avatar
bertilak
Posts: 10725
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Which is the smartest lot to pull from?

Post by bertilak »

iamblessed wrote: Wed Jan 26, 2022 7:13 am The way I look at it if I sell the biggest loser whose losses are gone forever.
The "harvested" losses are not gone forever as they can be carried forward from (tax) year to (tax) year.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
sureshoe
Posts: 2165
Joined: Tue Jan 15, 2019 3:26 pm

Re: Which is the smartest lot to pull from?

Post by sureshoe »

iamblessed wrote: Wed Jan 26, 2022 9:39 am
livesoft wrote: Wed Jan 26, 2022 7:35 am The way I look at it: I will sell all my losers first. If I still need those shares to complete my asset allocation, then I will replace those shares by buying substantially similar, but not substantially identical shares somehow.

If I have a share of VTSAX worth $220 that was purchased for $200 and a share of VTSAX that is worth the same $220 that I purchased for $240, then I am definitely selling the share purchased at $240. After the sell transaction, then I would have the same number of shares of VTSAX that I would have if I sold the other share. That is, realizing the loss of $20 would not change what I end up with.

However, maybe you are asking about selling VTSAX at a loss while still holding VTIAX at a slight gain? That would change your asset allocation and you would probably want to do something to correct that. In that case, selling the losing shares of VTSAX in a tax-loss harvesting move is still a good thing to do (and buying replacement shares), but you could still sell that VTIAX as well and use your tax-advantaged account to rebalance back to your desire asset allocation. And you can still have your taxable account at 88/12 if you like as well.
You have more money on the side than me. I am not worried about spending down some each year. Under my plan I do not rebalance unless my cash bucket is down. I just do not want to spend a loser because I will have no more time to wait for him to recover. In a bear they would all be losers and I will be forced into the cash bucket.
This is where your logic is off. It might help if you list the mutual fund, but ultimately what does it matter?
Sell $10k of this mutual fund (or whatever the amount is). Repurchase a similar mutual fund that tracks close, but isn't identical.

The only reason to not do this is if you think this MF will outperform all others, and there is absolutely 0 reason to believe such a thing.
sureshoe
Posts: 2165
Joined: Tue Jan 15, 2019 3:26 pm

Re: Which is the smartest lot to pull from?

Post by sureshoe »

MrCheapo wrote: Wed Jan 26, 2022 9:58 am
iamblessed wrote: Wed Jan 26, 2022 6:58 am I am retired and have a 88/12 stock cash barbell. I plan to pull from stocks as long as they are in the black. When they go in the red I will pull from cash. My stock lots look like this
1. Up a lot
2. Up a little
3. Down a little
4. Down a lot

Which lot is the smartest lot to pull from 1-4
I am guessing number 2 but I don't know.
Interesting that many people are saying "sell the losers". But maybe they are loser for the next year or so and then blossom. I'm surprised the actual stock itself doesn't come into the play. I held Amazon for a few years and it was a loser until it picked up momentum. Same for NetFlix and most tech stocks.
People are assuming we're talking about a MF or ETF, for which there is no reason to believe you can get a similar, but not identical, replacement while harvesting the loss.

For individual stocks, replacing with something that tracks nearly the same is much harder. However, there is no reason to think a loser will pick up momentum any more than it continues to fade.
dlw322
Posts: 106
Joined: Thu Mar 29, 2012 8:01 pm

Re: Which is the smartest lot to pull from?

Post by dlw322 »

Am I missing something. If he's spending the money and he's in the 12% tax bracket (0% for LTCGs) wouldn't he be better off selling winners as long as he will still remain in the 12% tax bracket
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: Which is the smartest lot to pull from?

Post by MattB »

dlw322 wrote: Wed Jan 26, 2022 1:02 pm Am I missing something. If he's spending the money and he's in the 12% tax bracket (0% for LTCGs) wouldn't he be better off selling winners as long as he will still remain in the 12% tax bracket
This is a good question. Where is the cut offs for the 12 percent bracket, and for 0% LTCGs?
Mike Scott
Posts: 3579
Joined: Fri Jul 19, 2013 2:45 pm

Re: Which is the smartest lot to pull from?

Post by Mike Scott »

All of the shares of the same fund are worth the same today no matter what you paid for them.
Waiting for prices to recover is not relevant if you need the money now.
If you are spending the funds, TLH does not matter but selling the losses gives you a tax advantage compared to selling gains at 0% or higher tax rate.
Californiastate
Posts: 1516
Joined: Thu Feb 04, 2021 10:52 am

Re: Which is the smartest lot to pull from?

Post by Californiastate »

dlw322 wrote: Wed Jan 26, 2022 1:02 pm Am I missing something. If he's spending the money and he's in the 12% tax bracket (0% for LTCGs) wouldn't he be better off selling winners as long as he will still remain in the 12% tax bracket
Bingo if it's a taxable account.
harikaried
Posts: 2613
Joined: Fri Mar 09, 2012 2:47 pm

Re: Which is the smartest lot to pull from?

Post by harikaried »

iamblessed wrote: Wed Jan 26, 2022 7:04 amI am in the 12% tax bracket
If your taxable income is pretty easy to predict, then it seems like if your total taxable income stays under ~$40.5k (single), you can realize long-term gains at 0% tax. So depending on how much money you need to spend, you might realize some gains and losses as well as additional lots with gains as long as you stay at 0% LTCG. These additional lots with gains could be repurchased with a new/higher basis saving on taxes in the future as well.

https://www.bogleheads.org/wiki/Tax_gain_harvesting
livesoft
Posts: 86079
Joined: Thu Mar 01, 2007 7:00 pm

Re: Which is the smartest lot to pull from?

Post by livesoft »

If the OP sells the losing shares now, then they can always tax-gain harvest later. However, if the losing shares recover, then the tax savings are lost forever -- or at least until they drop again.

Basically, selling the shares with the most losses does a few things:
1. Avoid the behavioral finance trap of loss aversion.
2. Avoid getting taxed on gains (there are no gains).
3. Gives a tax break now and in the future.
4. Gives the option of selling other shares this year at a gain without tax consequences.
5. Does not stop any tax-gain harvesting to be done later this year.
Last edited by livesoft on Wed Jan 26, 2022 2:50 pm, edited 1 time in total.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
iamblessed
Posts: 1808
Joined: Sat Jun 09, 2018 11:52 am
Location: St. Louis

Re: Which is the smartest lot to pull from?

Post by iamblessed »

It is tax free for the Feds. I do pay the state taxes. It is a taxable account.
User avatar
Ray_McKigney
Posts: 148
Joined: Sun Jul 28, 2019 11:48 am

Re: Which is the smartest lot to pull from?

Post by Ray_McKigney »

iamblessed wrote: Wed Jan 26, 2022 10:18 am
Ray_McKigney wrote: Wed Jan 26, 2022 9:52 am
iamblessed wrote: Wed Jan 26, 2022 7:13 amThe way I look at it if I sell the biggest loser whose losses are gone forever.
But you're replacing it with something that's highly correlated to your loser, something that might recover in the future just like your loser would.

You get the benefit of paying less in taxes now without really losing anything. And you might be able to avoid or reduce the greater tax bill later.
I am spending the dough. Not replacing it with anything. It is all the same mutual fund.
But you said you already have cash, yes? If so, you can use your cash to replace what you sell with something highly correlated but not substantially similar.
Master of my domain
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: Which is the smartest lot to pull from?

Post by MattB »

livesoft wrote: Wed Jan 26, 2022 2:45 pm If the OP sells the losing shares now, then they can always tax-gain harvest later. However, if the losing shares recover, then the tax savings are lost forever -- or at least until they drop again.

Basically, selling the shares with the most losses does a few things:
1. Avoid the behavioral finance trap of loss aversion.
2. Avoid getting taxed on gains (there are no gains).
3. Gives a tax break now and in the future.
4. Gives the option of selling other shares this year at a gain without tax consequences.
5. Does not stop any tax-gain harvesting to be done later this year.
You seem to be suggesting they should sell the losing shares now. I'm not sure I agree with that. I'm not sure I disagree with it either. Consider the following hypothetical.

Givens:
  • Lots A and B of the same security, with the same value (X).
  • Lot A has unrealized capital gain of value Y.
  • Lot B has unrealized capital loss of value Y.
  • Holder will remain in the 0% LTCG bracket with sale of A or B.
Option 1: Holder sells A, receives $X, pays no taxes, and retains lot B with unrealized capital loss of value Y. In this case, the holder will not incur taxable gains if lot B appreciates by $Y.

Option 2: Holder sells B, receives $X, pays no taxes, harvests capital loss of value Y, retains lot A with unrealized capital gain of value Y. In this case, the holder may incur taxable gains if lot A appreciates by $Y, depending on their future capital gains bracket.

Option 1 seems to yield the better outcome. Option 2 may produce the same outcome, but is dependent on their future capital gains bracket.

Am I correct?
MrJedi
Posts: 3540
Joined: Wed May 06, 2020 11:42 am

Re: Which is the smartest lot to pull from?

Post by MrJedi »

Not quite that simple. Option 1 will raise AGI which can have other side effects. For example Roth conversion strategies to fill 12% bracket or 0% LTCG bracket. Higher AGI means less Roth conversion.

There is also a state tax that OP did confirm exists.

Also note that Op has not confirmed if these shares have long term treatment or not, I think we are all assuming yes.
Topic Author
iamblessed
Posts: 1808
Joined: Sat Jun 09, 2018 11:52 am
Location: St. Louis

Re: Which is the smartest lot to pull from?

Post by iamblessed »

Ray_McKigney wrote: Thu Jan 27, 2022 11:45 am
iamblessed wrote: Wed Jan 26, 2022 10:18 am
Ray_McKigney wrote: Wed Jan 26, 2022 9:52 am
iamblessed wrote: Wed Jan 26, 2022 7:13 amThe way I look at it if I sell the biggest loser whose losses are gone forever.
But you're replacing it with something that's highly correlated to your loser, something that might recover in the future just like your loser would.

You get the benefit of paying less in taxes now without really losing anything. And you might be able to avoid or reduce the greater tax bill later.
I am spending the dough. Not replacing it with anything. It is all the same mutual fund.
But you said you already have cash, yes? If so, you can use your cash to replace what you sell with something highly correlated but not substantially similar.
I need that cash to pay bills if I go in the red in the market.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Which is the smartest lot to pull from?

Post by grabiner »

MattB wrote: Thu Jan 27, 2022 12:16 pm You seem to be suggesting they should sell the losing shares now. I'm not sure I agree with that. I'm not sure I disagree with it either. Consider the following hypothetical.

Givens:
  • Lots A and B of the same security, with the same value (X).
  • Lot A has unrealized capital gain of value Y.
  • Lot B has unrealized capital loss of value Y.
  • Holder will remain in the 0% LTCG bracket with sale of A or B.
Option 1: Holder sells A, receives $X, pays no taxes, and retains lot B with unrealized capital loss of value Y. In this case, the holder will not incur taxable gains if lot B appreciates by $Y.

Option 2: Holder sells B, receives $X, pays no taxes, harvests capital loss of value Y, retains lot A with unrealized capital gain of value Y. In this case, the holder may incur taxable gains if lot A appreciates by $Y, depending on their future capital gains bracket.

Option 1 seems to yield the better outcome. Option 2 may produce the same outcome, but is dependent on their future capital gains bracket.
Option 2 is likely to be better because the sale of B generates a capital loss, and $3000 of capital loss can be deducted from ordinary income every year. This is a $360 tax savings in a 12% bracket. Any unused carryover capital loss can offset the gain on A when it is sold in a future year, so that is still break-even.

The worst likely case is that you save $360 this year on the sale of B for a $3000 loss, and pay an extra $450 tax in a future year when you sell A in a year that you pay 15% tax on your capital gains. Even this may not be a loss, as the $360 you save this year can be invested and may grow to more than $450 by the time you sell A.
Wiki David Grabiner
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: Which is the smartest lot to pull from?

Post by MattB »

MrJedi wrote: Thu Jan 27, 2022 12:41 pm Not quite that simple. Option 1 will raise AGI which can have other side effects. For example Roth conversion strategies to fill 12% bracket or 0% LTCG bracket. Higher AGI means less Roth conversion.

There is also a state tax that OP did confirm exists.

Also note that Op has not confirmed if these shares have long term treatment or not, I think we are all assuming yes.
Appreciate the response. This has been one of the more interesting thought experiments I've run into here.
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: Which is the smartest lot to pull from?

Post by MattB »

grabiner wrote: Fri Jan 28, 2022 10:22 pm
MattB wrote: Thu Jan 27, 2022 12:16 pm You seem to be suggesting they should sell the losing shares now. I'm not sure I agree with that. I'm not sure I disagree with it either. Consider the following hypothetical.

Givens:
  • Lots A and B of the same security, with the same value (X).
  • Lot A has unrealized capital gain of value Y.
  • Lot B has unrealized capital loss of value Y.
  • Holder will remain in the 0% LTCG bracket with sale of A or B.
Option 1: Holder sells A, receives $X, pays no taxes, and retains lot B with unrealized capital loss of value Y. In this case, the holder will not incur taxable gains if lot B appreciates by $Y.

Option 2: Holder sells B, receives $X, pays no taxes, harvests capital loss of value Y, retains lot A with unrealized capital gain of value Y. In this case, the holder may incur taxable gains if lot A appreciates by $Y, depending on their future capital gains bracket.

Option 1 seems to yield the better outcome. Option 2 may produce the same outcome, but is dependent on their future capital gains bracket.
Option 2 is likely to be better because the sale of B generates a capital loss, and $3000 of capital loss can be deducted from ordinary income every year. This is a $360 tax savings in a 12% bracket. Any unused carryover capital loss can offset the gain on A when it is sold in a future year, so that is still break-even.

The worst likely case is that you save $360 this year on the sale of B for a $3000 loss, and pay an extra $450 tax in a future year when you sell A in a year that you pay 15% tax on your capital gains. Even this may not be a loss, as the $360 you save this year can be invested and may grow to more than $450 by the time you sell A.
Got it. Thanks for the discussion.
Post Reply