We successfully tax loss harvested - Is there a need to "use up" the losses?

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Redlee
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Joined: Mon Apr 09, 2018 9:15 pm

We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by Redlee »

We have been tax loss harvesting whenever we have a chance to do so. We have a Boglehead portfolio of low cost index ETF's/mutual funds (all in equity) that are pretty tax efficient. We do not sell any holdings in taxable accounts except to tax loss harvest, so we don't normally see much in the way of capital gains. The capital gains we have was passed through from mutual funds due to activity on their end, and not due to sales we made.

My questions: We already have considerable capital loss carryforwards, and we tax harvested a lot of gains. Since we don't sell in taxable, we usually see very little in the way of realized capital gains. I'm not sure if we are sort of "wasting" our harvested losses, by not having enough more capital gains. Should we be considering to sell some of our appreciated holdings in order utilize these losses, or should we just keep the losses for when we eventually do have more capital gains at some point in the future?

Also, I know that only $3,000 of losses can offset ordinary (non-investment) income each year. But there is no limit on the amount of loss carryforward that can be applied to offset capital gains, correct? So if we end up having $125,000 in capital losses carried forward, and next year we (just as an example) sold our house and realized $200,00 in gains, we'd be able to use up the losses to offset that, correct?

Some background information:

Holding in our accounts: About $7 Million
Adjusted Gross Income last year: $360,000
Realized Long Term Gain last year: $7,000
Realized Short Term Gain last year: $0
We are in California, which has a state income tax.

Capital Loss Carryforwards from 2021:
--Short-Term: $29,500
-- Long-Term: $49,000

Realized Capital Losses THIS YEAR (2022) from tax loss harvesting:
-- Short-Term: $36,200
-- Long-Term: $54,300
ryman554
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by ryman554 »

Not only can you, you *must* use up capital loss carryover on any future year's capital gains before you are allowed to take $3k against normal income.

And, yes, it definitely eats up any house sales proceeds above the (hopefully!) $500k exemption you may have.

I used every penny of it this year. Won house lottery (VHCOL to HCOL trade in April....) + 6 digit tax loss harvesting was serendipity for me.
Topic Author
Redlee
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by Redlee »

ryman554 wrote: Thu Dec 08, 2022 12:36 am Not only can you, you *must* use up capital loss carryover on any future year's capital gains before you are allowed to take $3k against normal income.

And, yes, it definitely eats up any house sales proceeds above the (hopefully!) $500k exemption you may have.

I used every penny of it this year. Won house lottery (VHCOL to HCOL trade in April....) + 6 digit tax loss harvesting was serendipity for me.
If we just proceed as normal, I'd expect that the losses will be applied to about $8,000 of gains and $3000 of ordinary income per year, and so we could expect our current losses to last around 10 years or so before they are fully depleted. And that isn't even accounting for any new losses we may harvest.

So would there be a reason to sell some appreciated holdings in order to recognize gains--basically to do some tax GAINS harvesting to utilize the losses more quickly?
livesoft
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by livesoft »

Redlee wrote: Thu Dec 08, 2022 12:53 am So would there be a reason to sell some appreciated holdings in order to recognize gains--basically to do some tax GAINS harvesting to utilize the losses more quickly?
Some reasons:
1. You want to unload something that should not be in your portfolio.
2. You want to rebalance and the only way to do that is to sell something at a gain in taxxable.
3. You need to sell something at a gain in order to pay some expense (college, vacation, new vehicle, beach condo).

I don't think there is any reason to sell just to use up gains for no other purpose.
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lakpr
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by lakpr »

If you live in NJ, capital losses are not allowed to be carried forward nor applied to be offset against wages. That makes it more advantageous to incur capital gains to offset all losses in the same year they are incurred, at practically every tax bracket (except the 12% one).
Vtsaxandchill
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by Vtsaxandchill »

So just to clarify:
Investopedia says, “ Tax-loss harvesting only defers tax payments—it does not cancel them. If an investor has no capital gains to offset in the year the capital loss was “harvested,” the loss can be carried over to offset future gains or future income. there is no expiration date.“

Question:
So if one has 100k of losses harvested in year 1 and for the next 10 years uses it for tax income offset x $3000= 30k they have 70k left over loss harvested. Say they anticipate a big purchase 5 years later. Can they just hang on to the 70k of losses and wait to use them 15 years post harvest?.
livesoft
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by livesoft »

Yes, unused losses get carried over every tax year ... until you die and they go away. However, one must also consider that the intrinsic value of carryover losses are also affected by inflation just like other things. After all, a million dollars ain't what it used to be.
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sycamore
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by sycamore »

Vtsaxandchill wrote: Thu Dec 08, 2022 6:49 am Question:
So if one has 100k of losses harvested in year 1 and for the next 10 years uses it for tax income offset x $3000= 30k they have 70k left over loss harvested. Say they anticipate a big purchase 5 years later. Can they just hang on to the 70k of losses and wait to use them 15 years post harvest?.
Ask yourself "now that it's year 11 and I have 70k of loss carryover as well as 3k of income this year, can I wait to use my carryover?"

If you look at how your tax return works you'll see that the answer is no -- you have to use up (some of) your carryover every year if there's any cap gains or income. The only way to not use up any carryover is if you have no cap gains or income in a given year.
Dontridetheindexdown
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by Dontridetheindexdown »

It is sometimes useful to "use up" the losses, depending on age and health status.

For married filing jointly, a relict (surviving spouse) retains 1/2 the carried forward losses, the other 1/2 disappear with the decedent.

This also applies to capital gains tax exclusion on the sale of a primary residence, $500,000 for MFJ, $250,000 for single.
MarkNYC
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by MarkNYC »

Dontridetheindexdown wrote: Thu Dec 08, 2022 8:05 am For married filing jointly, a relict (surviving spouse) retains 1/2 the carried forward losses, the other 1/2 disappear with the decedent.

This also applies to capital gains tax exclusion on the sale of a primary residence, $500,000 for MFJ, $250,000 for single.
Neither statement above is accurate.

When one spouse dies and there are capital loss carryovers to the following year, a tracing must be done to determine which spouse sustained the losses because only losses sustained by the surviving spouse can be carried forward. If all of the losses were generated in an account owned by the surviving spouse, then 100% of the carryforward losses can be taken by the surviving spouse. If the losses were generated entirely from an account owned by the deceased spouse, then none of the carryforward losses can be taken by the surviving spouse. If the losses came from a joint account, then 1/2 can be taken.

For the principal residence exclusion, the $500K exclusion amount available for couples on a joint return remains available to a surviving spouse who does not remarry for two years after the date of death of the deceased spouse.
tcrez
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by tcrez »

If I tax loss harvested say 30k and I don't have any capital gain to use it up this year or subsequent years, I can deduct it against 3k of income per year.

My main concern is, am I losing out big because the 30k is not inflation adjusted so by the 10th year 3,000 isn't worth very much anymore? Would I have been better not taking a 30k loss this year?
nolesrule
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by nolesrule »

tcrez wrote: Thu Dec 08, 2022 12:27 pm If I tax loss harvested say 30k and I don't have any capital gain to use it up this year or subsequent years, I can deduct it against 3k of income per year.

My main concern is, am I losing out big because the 30k is not inflation adjusted so by the 10th year 3,000 isn't worth very much anymore? Would I have been better not taking a 30k loss this year?
If you otherwise didn't take the loss, what is the final outcome? When are you planning to ultimately dispose of those shares, and for what purpose? How much in taxes will you save on that $30k of higher basis? You could save taxes on the $30k at your marginal long term capital gains rate, or it could save you nothing, because you might be in a lower bracket, or you might donate the shares to a charity. What scenarios will you come out ahead doing nothing vs. having TLH that you can apply against ordinary income for 10 years?
Last edited by nolesrule on Thu Dec 08, 2022 2:06 pm, edited 1 time in total.
tcrez
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by tcrez »

I guess I would hold for longer term. Maybe use them someday but not for a while.
nolesrule
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by nolesrule »

tcrez wrote: Thu Dec 08, 2022 2:04 pm I guess I would hold for longer term. Maybe use them someday but not for a while.
In that case wouldn't the value of the $30k due to unchanged basis also diminish over time? And at best it would save you taxes at long term capital gains rates at a future unknown point in time rather than ordinary income rates on $3k a year for the next 10 years.
tcrez
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by tcrez »

If I realize an extra 30k in losses today, I'll be able to save 3k a year in ordinary income rates (which is higher than long term capital gain rates).

If I realize the 30k in losses say 10 years from now, I'll be able to save 30k a year all at once in longer term capital gain rates (which is lower than ordinary income rates).

Still seems like realizing 3k a year for 10 years is better...because ordinary income tax rates are higher and I can use the extra savings on taxes to invest more during that time period.

Is that right?
lakpr
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by lakpr »

tcrez wrote: Thu Dec 08, 2022 5:12 pm Still seems like realizing 3k a year for 10 years is better...because ordinary income tax rates are higher and I can use the extra savings on taxes to invest more during that time period.

Is that right?
Yes, but a twist. You cannot incur ANY capital gains in the intervening 10 year period. If you do, those are automatically offset first (in effect your losses will be credited back to you at long-term-capital-gains tax rate instead of ordinary income tax rate you might be expecting).

IRS rules force the following order every year (you do not get to choose!)

1. short term losses offset short term gains
2. long term losses offset long term gains
3. any remaining losses of one type offset any gains of the other type
4. if there are any losses remaining, then they offset $3k per year of ordinary income
5. following year, go back to step-1

How confident are you that you will NOT sell any investments in the intervening 10 years to raise money, and therefore incurring capital gains?
Alan S.
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by Alan S. »

nolesrule wrote: Thu Dec 08, 2022 2:08 pm
tcrez wrote: Thu Dec 08, 2022 2:04 pm I guess I would hold for longer term. Maybe use them someday but not for a while.
In that case wouldn't the value of the $30k due to unchanged basis also diminish over time? And at best it would save you taxes at long term capital gains rates at a future unknown point in time rather than ordinary income rates on $3k a year for the next 10 years.
Yes, inflation will erode the value of a cap loss CO but consider that the meager 3000 limit for offsetting ordinary income has not been increased to reflect inflation since 1977. That's 45 years of compounded inflation which has now become hyper inflation. Hello?
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Leif
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by Leif »

I had a lot of losses in 2008-9. Until recently I was using these to offset $3,000/year of income. In addition I had an occasion CG which was offset. Just as I was running low on losses the pandemic came around and provide more losses to bank.

So I would not be in a hurry to "use up" your losses.
aspiringboglehead
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by aspiringboglehead »

Vtsaxandchill wrote: Thu Dec 08, 2022 6:49 am So just to clarify:
Investopedia says, “ Tax-loss harvesting only defers tax payments—it does not cancel them. If an investor has no capital gains to offset in the year the capital loss was “harvested,” the loss can be carried over to offset future gains or future income. there is no expiration date.“
One additional consideration (beyond what Investopedia says here) is that if you eventually leave the assets in question to charity and/or die with them, TLH does in fact reduce your taxes forever because you'll never pay the corresponding capital gains.

That changed my view of TLH. In the past, I would do it casually if it were very easy, but I never was aggressive about it because a mere deferral wasn't worth the effort. But for assets that you intend either to hold forever or to donate to charity -- what you might think of as "excess" assets that you have no plausible reason to sell for personal use -- TLH can make a large tax difference. And you get the benefit immediately (at least up to your gains or $3000/year).
tcrez
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by tcrez »

So is the consensus is to rack up as much loss as possible using TLH even if theres little or no plan to realize capital gains in the future?
aspiringboglehead
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by aspiringboglehead »

tcrez wrote: Thu Dec 08, 2022 7:48 pm So is the consensus is to rack up as much loss as possible using TLH even if theres little or no plan to realize capital gains in the future?
I think the accurate thing to say would perhaps be more like: racking up properly harvested losses has no downside unless you accumulate more losses than you expect to be able to use in your lifetime (accounting for your future capital gains and the $3000/year allowance).

Of course, at the taxpayer's death, there are no capital gains anyway, so "losses" that your estate can't use may not matter. But because the TLH losses "expire" on death, the process of engaging in TLH in the first place could have incurred some small costs that were themselves wasted.

There is no "cost" to having capital losses pending and carried over apart from their expiration upon the taxpayer's death. The "cost" of not locking them in is potentially missing out on them altogether (if the market rises). There is usually no reason to "accelerate" gains just to cancel out the carryforward - but if you have gains you want to take anyway, the carryforward is there and offsets them.
rkhusky
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by rkhusky »

If you expect to incur significant capital gains in the near future that would be taxed at 0% anyway, but expect to be in a higher LTCG bracket after that, then TLH'ing may be detrimental.
Topic Author
Redlee
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Re: We successfully tax loss harvested - Is there a need to "use up" the losses?

Post by Redlee »

aspiringboglehead wrote: Thu Dec 08, 2022 7:01 pm
Vtsaxandchill wrote: Thu Dec 08, 2022 6:49 am So just to clarify:
Investopedia says, “ Tax-loss harvesting only defers tax payments—it does not cancel them. If an investor has no capital gains to offset in the year the capital loss was “harvested,” the loss can be carried over to offset future gains or future income. there is no expiration date.“
One additional consideration (beyond what Investopedia says here) is that if you eventually leave the assets in question to charity and/or die with them, TLH does in fact reduce your taxes forever because you'll never pay the corresponding capital gains.

That changed my view of TLH. In the past, I would do it casually if it were very easy, but I never was aggressive about it because a mere deferral wasn't worth the effort. But for assets that you intend either to hold forever or to donate to charity -- what you might think of as "excess" assets that you have no plausible reason to sell for personal use -- TLH can make a large tax difference. And you get the benefit immediately (at least up to your gains or $3000/year).
Or you die and the basis of your appreciated assets is bumped up the fair market value for your heirs (zeroing out any unrealized capital gains), and so again you don't care that you lowered the basis during your lifetime.

In a community property state, the basis for all of the community property assets will be bumped up on the death of the first spouse. So there are benefits to transmuting separate property to community property, although of course if the marriage fails this property is now community property, not separate property.
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