Is it wise to realize capital losses to offset long-term capital gains? $12k of LT cap gain, $20k unrealized cap gains. Wiser to realize in future to reduce income/STCG?

[willymck]

The stock is at an all-time low, but likely to increase significantly. The question is should I realize losses now ($20k) or (assuming the stock returns to its target) realize losses in the future ($10k of loss). The reason I'm hesitant to realize these losses now is the stock target is higher and I would only be offsetting long-term capital gains. I don't have any short-term capital gains in 2021. If it matters, the current $20k capital loss is evenly split as long-term/short-term capital loss and is all in the same stock.

I do understand the tax treatment and being able to roll some the loss forward each year after applying to up to $3000 of other income types. I just want to make sure I'm not missing something in my logic - it doesn't feel like I should realize these losses when I only have a 15% tax liability on the long-term capital gains. Thank you!!

[Critter-3]

This is a situation you have to decide for yourself  HOWEVER  if you do sell off the losers you CANNOT rebuy them for 30 days (before or after the sale date)  or you will trigger a wash sale disallowance which will not get you the result you seek. 

[willymck]

Would the following restatement change the opinion? 

For 2021, if I realized the loss of this stock, for $12k, I would only be offsetting 15% tax liability ($1800). 

If I waited until 2022, assuming the stock price did not change, I could start to offset income or short-term capital gains at my marginal tax rate (>15%). 

Additionally, if the price of the stock did increase, my losses are reduced and I would be able to use those losses in 2022 and beyond to offset a portion of my other income at my marginal tax rate. 

If I am comfortable holding the stock and expect/lock an assumption that the price will increase, my question is does it make sense or am I missing something that would drive me to offload all of the losing stock this year? 

[Critter-3]

All good points but only you can make the decision that you have to live with ... who knows what tomorrow will bring.

[fanfare · Accepted solution]

if you believe this stock will rebound, you can sell it, wait 31 days, buy it back.

you will get a tax deduction.

If the stock starts moving up immediately after you sell it (typical) you will miss out on the first month of the rebound. You might have to repurchase fewer shares.

Your tax deduction is your compensation for that risk.

January is usually an up month, especially when December is up, as it is this week,

[fanfare]

generally, in the past, the best advice was, don't buy and sell on tax considerations.

With the current tax-loss-harvesting trend that's no longer the current advice.

[willymck]

The concern I keep coming back to is that I would only be offsetting long term capital gains ($12k) at a 15% tax rate ($1800 tax liability). If I sold this same stock at a loss next week (2022), it could offset short term capital gains or income instead...

But returning to the 2021 scenario:  I have some tax benefit if I sold all this year ($1,800 in long term capital gains tax offset, plus marginal tax of $3,000 this year, probably around $1,050). This would leave a capital loss carryover of $5,000 to use in upcoming years, potentially offsetting another $3,000 in income or cap gains in 2022, and another $2,000 in 2023. (All assuming I don't have any long term capital gains to offset in either of those years). 

Assuming 35% marginal tax rate, this would amount to another $1,050 and $700, respectively. 

In summary, I stand to benefit from:

$1800 + 1050 + 1050 + 700 = $4600 in tax benefit by harvesting these losses in 2021, and would be able to pick up the same stocks after 31 days if I wanted to re-invest in them. Based on my 250 shares owned, this would translate to a buffer of $18.40/share increase where I could re-buy and still be favorable. 

Am I looking at that correctly? 

[Critter-3]

You have the basics correct ... but you have to decide on which path is best for you based on your personal information.  Of course the market is always the unknown in any plan ... it could go up or it could take a dive.  

[fanfare]

Another way to capitalize (no pun) on low price is to write a PUT option.

 A February  2022 put would be short term capital gain in 2022 if it expires. You collect the premium now no matter what happens. If assigned, the 31-day countdown starts.

Generally, don't do this unless the stock has lots of option activity and therefore liquidity.

If you'll name the stock, I'll look that up for you.

[willymck]

Just to clarify, I'm not looking for investment advice and where the market might be going, but rather my understanding of the tax treatment of this loss. If we make one assumption: the price of the stock will be relatively similar Tuesday, Dec 28, 2021 and Tuesday, Jan 4, 2022, and:

In 2021, I have long term capital gains of 12k 

In 2022, I don't plan to have any long term capital gains. 

Would it be more beneficial to realize 20k in capital losses in 2021, or wait until those losses can offset purely income or short-term capital gains in 2022+. 

Thank you!

[willymck]

@fanfare This is PTON stock I purchased after doing ok on their IPO in 2020. I appreciate the offer to check it out! I also appreciate the pun. 😄 

[fanfare]

I sent you a PM.