Write off capital losses for stocks paying monthly dividends?

[bencundiff]

Hi guys,

I purchased a decent amount of ETFs that pay monthly dividends. I have some unrealized losses on those funds, e.g. I purchased a large volume of JEPI when it was trading at $59 a share and the shares are now worth $55. 

I'd like to reduce my taxable footprint, and plan on selling some ETFs and stocks at a loss for tax loss harvesting purposes. 

It's my understanding that, if stocks pay monthly dividends, it can complicate writing off losses realized when selling the shares. What exactly should I look for to determine whether or not I could write off enough capital losses to make it worthwhile? I have dividend reinvestment (DRIP) set up for those shares. If I can't write off the capital gains losses, then I'd rather just keep the shares I have. 

My apologies if this is a dumb question - I'm not too familiar with taxes nor financial stuff in general.

[KeithS-2020]

Hi, @bencundiff.

This is not a dumb question at all. Capital losses are not at all straightforward.

First, we need to make sure you are aware that you can only use a maximum of $3,000 to offset ordinary income each year. As an example, say you have:

Capital Losses: $50,000

Capital Gains:     10,000

Net Loss:              40,000

You would only be able to take a $3,000 loss, and the remaining $37,000 would carry over to the next year, where it can be used to offset gains, plus another $3,000.

It's not the payment of monthly dividends that will complicate your taxes, but the re-investment (through DRIP or not). If you sell all of your stock, some of your gain or loss will be short-term, as you will have held the last twelve months' of DRIP shares less than one year. Also, you will have a different purchase price (basis) for each of those buys.

As a reminder, only long-term capital gains receive the lower capital gains rates; short-term gains are taxed at ordinary income rates up to 37%.

[bencundiff]

Hi @KeithS-2020 

Thanks for the detailed response and for confirming it's not just me. 

Just to make sure I interpreted correctly, let me make sure I'm understanding what some back-of-the-envelope estimates for my deductible losses would look like:

January 2022: Buy $10,000 worth of an ETF at $60/share

Feb-Oct: shares pay out $15 per month of dividends, reinvested with DRIP

Nov 2022: ETF has dropped to $50/share. My initial investment is now only worth $8,300, but I've received something like $150 in dividends, which have been reinvested into about 3 shares of the same ETF. 

That would sum up to $1700-$150 = $1550 in deductible losses if I sold all the original shares purchased in January, correct? 

If I sold some (not all) of the shares of that ETF, wouldn't it all be considered short term losses, assuming the losses exceed the dividends paid out? I don't plan on selling all the shares - only some of the shares I purchased in the last fiscal year.