Hello,
I read a recent article on Forbes that states that there isn't any advantage to realizing the maximum long term loss that you can:
Q. Should I recognize all of the unrealized capital losses I have now?
In general, you should recognize capital losses to the extent of your capital gains, plus $3,000. Why not more? Any losses in excess of this amount will result in no current income tax benefit. Of course there is no way of know not whether you will have additional capital gains later in the year—and by then these losses may have turned into gains.
But i'm thinking that if you stockpile this year on long term capital losses, you can use these losses to offset short term capital gains in following years (which would be taxed at higher rate) and then when you finally realize the capital gains you'll pay the lower capital gains on everything.
Consider the following situation with two possibilities:
2020:
1mil income
No short term capital gains
500k capital loss (Unrealized)
2021:
1 mil income
100k short term capital gains
900k long term capital gains (Unrealized)
2022
1 mil income
200k short term capital gains
400k long term capital gains (Unrealized)
2023: Selle everything
1 mil income
0 short term capital gains
-500k + 900k + 400k long term gains = 800k long term gains
Assuming tax bracket is 37% if you choose to not realize the 500k capital loss in 2020 then you'll end up paying in capital gains taxes:
2020 : 0
2021: 100k (short term) * 37% = 37k
2022: 200k (short term) * 37% = 74k
2023: 800k (long term) * 20% = 160k
But if you do realize the 500k capital loss in 2020 then you'll end up paying:
2020 : 0 (and carryover 500k capital loss
2021: 0 (the 100k short term fully offset by 2020 capital loss) *400k long term loss carry
2022: 0 (the 200k short term fully offset by 2020 capital loss) *200k long term loss carry
2023: (900k + 400k - 200k) * 20% = 220k
So in the first case you end up paying 37+74+160=271 in taxes, but in the 2nd you end up paying 220k in taxes.
Am I missing anything ?
