Offsetting Long-Term and Short Term Gains

[scotttiger]

Which is better: to offset short-term gains with long-term losses, or to offset long-term gains with short-term losses?

Should we try and match up our short-term gains with short-term losses and the same for long-term gains and losses?

Does it even matter?

My situation: I have about $5K ST gains and $35K LT gains already booked for 2022. I have 2 stocks with losses -- both with ST and LT on each -- and I don't think they will recover so quickly. The sale of the two would only cover a portion of the ST gain, and cover $13K of the LT gain. (I am not so worried about taxes on LT gains since they are taxed at 15%).

Should I try to find another ST loss to offset the ST gain above, or will the LT loss be applied and cover the remaining ST gain -- so I am only taxed on the uncovered LT gain at the lower rate?

[NCperson · Accepted solution]

the LT loss will offset the ST gain..... so it won't matter

go the the IRS website and print off a copy of Schedule D Form 1040 and work your way through it.  it is not difficult to prove it to yourself

https://www.irs.gov/pub/irs-pdf/f1040sd.pdf

look at Line 16 - it asks your to combine Line 8 (short term) and Line 15 (long term).,which is really at the heart of your question

[scotttiger]

Thanks for the advise to go and try and prove it to myself. I actually did go and look at Schedule D, 1040 lines 1 and 3a, and the Qualified Dividends and Capital Gain Tax Worksheet.

I also discovered -- I think -- that if you have the choice to blank out your ST gains or your LT gains by selling another asset, it seem better to sell the ST loser first. 

I went through some toy examples, setting 1040 Line 1 as $100K and Line 3a as 0 for simplicity. For the ST and LT scenarios, I had a stock sale for each category with a $10K gain, and a stock sale for each with a loss of $5K, for a net $5K gain in each category. On Schedule D, lines 7 and 15 are each $5K, and line 16 is $10K.

So to my question of whether it is better to sell more ST or LT losers first, let's say I can sell one more stock at a loss for $5K - either a stock with a ST loss for $5K or a stock with a LT loss for $5K.

If I choose the ST stock to sell, I have a net 0 for line 7 on Sch. D, and lines 15 and 16 are $5K. On the Cap Gains Worksheet, Line 3 would be the smaller of 15 or 16 -- doesn't matter since both are $5K -- and line 5 is $95K.

Line 17 of the worksheet is 5K and the 15% CapGain tax is $750, and the tax from the tax table for line 22 is based on $95K.

If I choose the LT stock to sell, I have a net $5K for line 7 on Sch. D, and line 15 is 0 and line 16 is $5K. On the Cap Gains Worksheet, Line 3 would be the smaller of 15 or 16 -- $0 -- and line 5 is $100K. Line 17 of the worksheet is 0 and the 15% tax is 0, and the tax for line 22 is based on $100K.

So, by pumping through these numbers, it seems like it is to one's advantage to try and match up ST losses with ST gains before selling a LT loser to minimize the tax paid, if given a choice.

Thoughts? Please feel free to correct me and/or point out my error -- I am by no means a tax guy; this is why I have used TT for over a decade.

[NCperson]

@scotttiger - while I didn't go through all your numbers, if you are sitting with both ST and LT gains at this time of year and you are trying to minimize the tax bite, AND you have a choice to sell ST losers or LT losers, selling the ST losers can be more valuable.

That further assumes your ordinary marginal tax rate is more than the LT Capital gains tax rate (which for most people is 15%). 

But this may not be as easy as it sounds and I'd be mindful that the proverbial 'tail isn't wagging the dog'. 

remember there are wash sale rules to contend with.  if you sell something at a ST loss, just to harvest the loss, you can't buy back a similar asset for another 30 days otherwise the loss is disallowed.  So if you believe in XYZ stock but you sell it for the tax harvesting loss, pray it doesn't begin zooming back up in the next 30 days - because if it does,  the reason to sell was for naught....

[scotttiger]

Beautiful. I am deciding which of the losers I would like to part with, so this exercise and your confirmation can help guide that decision.

I am aware of the wash rule as well -- maybe because I usually end up taking a bath when I sell. Traders actually consider my decisions to sell as buy signals.