If I have a worthless investment that I wish to write off. Do I need to sell a corresponding amount of securities to make this tax neutral for 2021?

[mharrissbn]

I invested in a LLC with intent to turn it into a functioning business but it never developed.  I know I can write off the losses but it seems that I have to have a capital gain to offset the losses vs regular income.  I can sell stocks to offset the losses for capital gains but need to know if this will work prior to the actual selling of the stocks.

[DanPaul02]

When your short-term gains or losses plus your long-term gains or losses result in a loss when added together, you have an overall loss that can be deducted against your other income.

If you don't want to sell in order to have capital gain, then you can defer the loss to use in a year when you do have gains.  There is no limit on the amount of years that the loss can be deferred.

[mharrissbn]

I can only carry forward $3000 a year in losses.  I would rather offset the loss with the sale of my stocks if the event is tax neutral in the current year.  To be specific, I have $34k in worthless investment that would take over 11 years to deferred.  I am not interested in doing that and would rather sell stocks if I can offset the capital gains in the current year.  

I have more stocks than losses so my intention is to sell an equal amount of stocks to match the $34k in losses to make the event tax neutral, if this is possible.

[VolvoGirl]

I think you understand but you wrote it wrong.  Its not that you only carryover 3,000.  You carryover the rest after the 3,000.

You get to first offset the loss against any gains you have each year so that can use more of it up.  Then after applying the loss to the current gains you can take a max loss of 3,000 (1,500 MFS)per year.

The rest you have to carryover to next year.  You have to report the carryover every year until it's used up.  You can't skip a year.  

[mharrissbn]

"You get to first offset the loss against any gains you have each year so that can use more of it up. "

So that is what matters.  I have $34k in losses and if I take $34k in gains in the same tax year, both events add up to a net $0 in the same tax year.

[macuser_22 · Accepted solution]

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@mharrissbn wrote:
I invested in a LLC with intent to turn it into a functioning business but it never developed.  I know I can write off the losses but it seems that I have to have a capital gain to offset the losses vs regular income.  I can sell stocks to offset the losses for capital gains but need to know if this will work prior to the actual selling of the stocks.

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Yes, and that is a strategy that many use to cash in the profit on long term capital gains that have a low cost basis (as long as the loss is unrelated to the gain so that it is not a "wash" sale).   They then use the proceeds of the sale to purchase the stock back so the cost basis become the new purchase.  Thus keeping the same investment but with a new cost basis.

Otherwise if the loss is more than the gain, up to $3,000 of ordinary income will be offset leaving any addition loss to be carried to the next tax year.     Losses must be claimed in the tax year that the loss occurred and tax years cannot be skipped or the carry-over will be forfeited.

[Mike9241]

we don't know what activity the LLC was engaged in but generally, losses would be ordinary and would offset other ordinary income such as wages, interest, dividends, etc. losses from the business in excess of other ordinary income would then offset capital gains.    offsetting ordinary losses with capital gains may not be the most advantageous.  as an example say $X of ordinary losses year 1 and $X long-term capital gains year 2. depending on your tax situation the ordinary losses could save you some income taxes in year 1. in year 2 because of the preferential rate given to LTCG you might pay $0 in income taxes on them.  

[fanfare]

@mharrissbn 

The only way to do what you want is to report the LLC loss on Schedule D.

You should do a trial tax return to prove how you are going to report it before you cash out capital gains you might not be able to offset.