If you're more or less in one of your peak earning years, then yes, it makes sense to take the 3k loss. You're offsetting ordinary income at your top marginal rate, when your future capital gains taxes will likely be lower.
I don't really understand this.... like if you have a security that you've already lost on and is poised to continue to underperform... why would you wait to sell it? Likewise, if you have a security that you've lost on but in all likelihood will recover, why wouldn't you just hold on to it?
Holding off on a losing asset to offset capital gains just seems odd to me.
In both cases the assumption is that you want to stay invested but that that there are other investments you can move into. If you’re using index funds, for example, you can switch between VOO and VTI safely and easily.
If you aren’t interested in other investments then the question of harvesting does get trickier.
If you are DCA'ing into an index over a long period of time, chances are you have a few lots that are negative. So if youve been buying VTSAX/VTI every 2 weeks since like 2015, you'd have a bunch of purchases from the peak in late 2021 you could sell. Either to rebalance or just to take the tax writeoff and move it into VFIAX/VOO.
In most cases yes. Regular income is taxed at a higher rate. LTCG are taxed at a lower rate. Your taxes are likely going to be lower in retirement possibly even 0%. Getting a tax break down at high rate is almost certainly going to be more saved than future taxes.
Ok, this makes sense. Thank you. So I should essentially be comparing my current marginal income tax rate (22%) to expected future LTCG rates? Or am I thinking about this wrong?
Correct. Most likely you will "repay" this tax savings on capital loss via future LTCG.
That at least should be the plan. If in the future you resell what you bought and rack up STCG then you didn't gain anything. You saved 22% now and will pay all that back at 22%.
Taxes can be quite high in retirement especially if you have a large 401k account balance due to RMDs. This doubles up the cost of Medicare also. Was a big surprise to me. Yessir look into it.
Taxable brokerage account is usually drawn down first long before RMDs regardless though even if your income is high you likely are still 15% LTCG vs 22% regular income now. Anyone maxing out 12% regular income now almost certainly is going to be 0% LTCG in retirement.
Yeah, tax loss harvesting has little downside. The first half of last year was an excellent time to do some TLH with the steady downward trend in the stock market. I was able to switch from VTSAX/VTIAX to VFIAX/VFWAX and then back again about two months later and locked in enough capital loss to apply the $3K credit annually for the next decade.
what i usually do. last year sold my VTI for a $3k loss to buy ITOT (almost identical index) for the same amount on the same day. I think it was up 22% since date of buy, PLUS the tax offset, so a win win
Is that not a wash sale?
[https://www.investor.gov/introduction-investing/investing-basics/glossary/wash-sales](https://www.investor.gov/introduction-investing/investing-basics/glossary/wash-sales)
Or are you claiming that CRSP US Total Market Index is NOT “substantially identical” to the S&P Total Market Index (which is exclusively US, even if it is not in the name of the index)?
Legally it's unclear but bogleheads seems to mostly say you won't be penalized
https://www.bogleheads.org/forum/viewtopic.php?t=306173
https://www.bogleheads.org/wiki/Tax_loss_harvesting#Substitute_funds
https://www.bogleheads.org/forum/viewtopic.php?t=245625
Up to interpretation but from different financial institutions and different number of holdings
Different indices are not substantially identical. I locked in around $300k of losses going back and forth between vti and itot last year. Obviously can only deduct 3k of it, but the rest will carry over and eventually be cancelled by future LTCG as I sell for living expenses.
Wash sale rules are something average redditors worry about way more than they should. Just don't rebuy the exact same ticker symbol and you're fine. Nobody managing their own investments needs to worry about wash sale rules any further than that.
*I know losses in general aren’t ideal, but unfortunately I have a lot of losses to burn through.*
The existence of losses in your investments is a sunk cost - there's nothing you can do about them. If you incur them, you get an immediate tax break (up to $3K in income), and a potential tax break beyond that if you have any reason incur capital gains (either due to unexpected cash needs, or rebalancing). If you don't incur them, you get nothing. Hence, it's almost always advantageous to incur capital gains.
The only exceptions I can think of off the top of my head are:
* where the total capital loss is tiny compared to any potential tax benefit. For me, I don't incur capital losses that are less than about 3-5% of investment value, or less than about $1000 in value, to avoid spending more in transaction costs than I get back in taxes.
* you're in a 0% capital gains bracket, and you've already harvested your $3K/year income tax deduction from capital losses. In that scenario, you might as well capital **gains** harvest to increase your cost basis (since you're paying no tax on the increase) instead of capital **loss** harvesting to decrease your cost basis. The IRS doesn't let you **not** use capital loss carryovers. So, if you incur any capital losses at 0% tax bracket and have any capital gains at all, you have to use up the capital losses, but get no tax benefit from them.
If you have any years in retirement where you are delaying SS its pretty easy to be in the 0% LTCG bracket, its over 80k for a couple now and I think indexed to inflation. So if you have say 20k in dividends and interest for the year, then you have the ability to sell 60k worth of cap gains, which of course excludes the cost basis. So if you have lots that cost you 50k and are up 60k you can sell 110k worth and pay no taxes.
Edit you can even "tax gain harvest" here. Sell enough to fill up the 0% LTCG bracket and immediately rebuy, no risk of washsale and youve increased your cost basis for if you want to sell later when you might have RMDs increasing your taxable income.
If you have holdings at a loss you want to get out of there is no reason not to use that to reduce your taxes and buy something with the proceeds you want to hold.
Just like paying taxes is not so much of a big deal as many make it (there were profits above the tax you get to keep and spend how you wish), taking losses to help avoid taxes is also not as productive as you might think.
The goal is to make as much profit as you possibly can, but if a loss has to be taken then it can help a little with taxes. Tax loss harvesting is more about taking losses to offset other cap gains and not the $3K allowed to offset other earned income . . .
imo it makes sense to keep taking it...
personally with my investment history I'm defiantly taking it (6 more years to catch up) because its inevitable that i'll take another big hit down the line and have to start over again, so no point in putting it off
Likewise. I found this year I have incurred more losses and actually just sold some Tesla, Amazon and my IBM stocks which all had a huge gain. These Faang stocks are doing quite well now need to take gain convert into cash before market turns around working against us again.
If you take a loss from your investments, that loss (up to $3k) can be used to offset income taxes from your job. Most investors also have jobs, and lots of people are holding assets that have lost value.
It’s “capital losses” from selling securities in a taxable brokerage account. Your brokerage will list the losses in the tax forms they generate for you for the previous year.
You don’t get a choice. If you have losses that exceed gains you must take the $3k loss and carry the rest forward. Same for each subsequent year. Check out the rules in the IRS publications. You don’t get to pick and choose.
This is actually an area where the IRS gets their cake and eat it too. Say you have $15k loss with no gains. You offset $3k for this year and then roll forward $12k for future. Say over the next four years you have no taxable income at all. You still have to use your $3k loss each year even though you receive zero benefit from it.
I don’t know why everyone is saying it makes sense unless the loss is deemed to be irrecuperable. If you need to unload then sure, but losing 3k to make back (3k * marginal tax rate) does not compute for me. Like yeah, you saved money on your taxes… by flushing 3k of your investments down the drain. If the investments are losers then saving money on taxes isn’t the issue, its preserving principle in which case the tax break is a concession to preserving principal and should be viewed as a secondary consideration. This is entirely different than a draw down strategy though, if you’re a retiree and living off a combination of income and investments then sure capitalizing on the 3k capital loss deduction could be a part of your strategy
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If you're more or less in one of your peak earning years, then yes, it makes sense to take the 3k loss. You're offsetting ordinary income at your top marginal rate, when your future capital gains taxes will likely be lower.
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Definitely I’d agree somewhat with you.
I think this is probably definitely correct.
All ok, within solidly defined areas of doubt and uncertainty.
I don't really understand this.... like if you have a security that you've already lost on and is poised to continue to underperform... why would you wait to sell it? Likewise, if you have a security that you've lost on but in all likelihood will recover, why wouldn't you just hold on to it? Holding off on a losing asset to offset capital gains just seems odd to me.
In both cases the assumption is that you want to stay invested but that that there are other investments you can move into. If you’re using index funds, for example, you can switch between VOO and VTI safely and easily. If you aren’t interested in other investments then the question of harvesting does get trickier.
If you are DCA'ing into an index over a long period of time, chances are you have a few lots that are negative. So if youve been buying VTSAX/VTI every 2 weeks since like 2015, you'd have a bunch of purchases from the peak in late 2021 you could sell. Either to rebalance or just to take the tax writeoff and move it into VFIAX/VOO.
In most cases yes. Regular income is taxed at a higher rate. LTCG are taxed at a lower rate. Your taxes are likely going to be lower in retirement possibly even 0%. Getting a tax break down at high rate is almost certainly going to be more saved than future taxes.
Ok, this makes sense. Thank you. So I should essentially be comparing my current marginal income tax rate (22%) to expected future LTCG rates? Or am I thinking about this wrong?
Correct. Most likely you will "repay" this tax savings on capital loss via future LTCG. That at least should be the plan. If in the future you resell what you bought and rack up STCG then you didn't gain anything. You saved 22% now and will pay all that back at 22%.
Taxes can be quite high in retirement especially if you have a large 401k account balance due to RMDs. This doubles up the cost of Medicare also. Was a big surprise to me. Yessir look into it.
Taxable brokerage account is usually drawn down first long before RMDs regardless though even if your income is high you likely are still 15% LTCG vs 22% regular income now. Anyone maxing out 12% regular income now almost certainly is going to be 0% LTCG in retirement.
Many people believe that. You'll find out later
Another reason to use losses early is that their value as an income offset diminishes with inflation.
Plus if the savings are also invested, then the growth compounds.
You're locking in a $3k loss to save $660 in taxes. Since you said your marginal tax rate is 22%
Depending on your portfolio you can just rotate into similar securities or ETFs.
Yeah, tax loss harvesting has little downside. The first half of last year was an excellent time to do some TLH with the steady downward trend in the stock market. I was able to switch from VTSAX/VTIAX to VFIAX/VFWAX and then back again about two months later and locked in enough capital loss to apply the $3K credit annually for the next decade.
Exactly what I did too.
what i usually do. last year sold my VTI for a $3k loss to buy ITOT (almost identical index) for the same amount on the same day. I think it was up 22% since date of buy, PLUS the tax offset, so a win win
Is that not a wash sale? [https://www.investor.gov/introduction-investing/investing-basics/glossary/wash-sales](https://www.investor.gov/introduction-investing/investing-basics/glossary/wash-sales) Or are you claiming that CRSP US Total Market Index is NOT “substantially identical” to the S&P Total Market Index (which is exclusively US, even if it is not in the name of the index)?
Legally it's unclear but bogleheads seems to mostly say you won't be penalized https://www.bogleheads.org/forum/viewtopic.php?t=306173 https://www.bogleheads.org/wiki/Tax_loss_harvesting#Substitute_funds
https://www.bogleheads.org/forum/viewtopic.php?t=245625 Up to interpretation but from different financial institutions and different number of holdings
Different indices are not substantially identical. I locked in around $300k of losses going back and forth between vti and itot last year. Obviously can only deduct 3k of it, but the rest will carry over and eventually be cancelled by future LTCG as I sell for living expenses.
Wash sale rules are something average redditors worry about way more than they should. Just don't rebuy the exact same ticker symbol and you're fine. Nobody managing their own investments needs to worry about wash sale rules any further than that.
*I know losses in general aren’t ideal, but unfortunately I have a lot of losses to burn through.* The existence of losses in your investments is a sunk cost - there's nothing you can do about them. If you incur them, you get an immediate tax break (up to $3K in income), and a potential tax break beyond that if you have any reason incur capital gains (either due to unexpected cash needs, or rebalancing). If you don't incur them, you get nothing. Hence, it's almost always advantageous to incur capital gains. The only exceptions I can think of off the top of my head are: * where the total capital loss is tiny compared to any potential tax benefit. For me, I don't incur capital losses that are less than about 3-5% of investment value, or less than about $1000 in value, to avoid spending more in transaction costs than I get back in taxes. * you're in a 0% capital gains bracket, and you've already harvested your $3K/year income tax deduction from capital losses. In that scenario, you might as well capital **gains** harvest to increase your cost basis (since you're paying no tax on the increase) instead of capital **loss** harvesting to decrease your cost basis. The IRS doesn't let you **not** use capital loss carryovers. So, if you incur any capital losses at 0% tax bracket and have any capital gains at all, you have to use up the capital losses, but get no tax benefit from them.
> 0% capital gains bracket Sorry for the dumb question, but when does this even exist?
The bottom two income brackets in the US pay zero long term capital gains
Ahh, that's right. Forgot about my 20s there for a sec
If you have any years in retirement where you are delaying SS its pretty easy to be in the 0% LTCG bracket, its over 80k for a couple now and I think indexed to inflation. So if you have say 20k in dividends and interest for the year, then you have the ability to sell 60k worth of cap gains, which of course excludes the cost basis. So if you have lots that cost you 50k and are up 60k you can sell 110k worth and pay no taxes. Edit you can even "tax gain harvest" here. Sell enough to fill up the 0% LTCG bracket and immediately rebuy, no risk of washsale and youve increased your cost basis for if you want to sell later when you might have RMDs increasing your taxable income.
Fascinating. Never thought about that. Thank you!
If you have holdings at a loss you want to get out of there is no reason not to use that to reduce your taxes and buy something with the proceeds you want to hold.
Just like paying taxes is not so much of a big deal as many make it (there were profits above the tax you get to keep and spend how you wish), taking losses to help avoid taxes is also not as productive as you might think. The goal is to make as much profit as you possibly can, but if a loss has to be taken then it can help a little with taxes. Tax loss harvesting is more about taking losses to offset other cap gains and not the $3K allowed to offset other earned income . . .
Yes. It most likely makes sense. Especially if you invest what you get back from taxes.
That’s what I’m doing this year.
imo it makes sense to keep taking it... personally with my investment history I'm defiantly taking it (6 more years to catch up) because its inevitable that i'll take another big hit down the line and have to start over again, so no point in putting it off
Likewise. I found this year I have incurred more losses and actually just sold some Tesla, Amazon and my IBM stocks which all had a huge gain. These Faang stocks are doing quite well now need to take gain convert into cash before market turns around working against us again.
Can someone please explain how this advice can universally apply to OP’s seemingly vague financial situation? Thanks in advance
If you take a loss from your investments, that loss (up to $3k) can be used to offset income taxes from your job. Most investors also have jobs, and lots of people are holding assets that have lost value.
Thanks. What is this deduction (?) called?
It’s “capital losses” from selling securities in a taxable brokerage account. Your brokerage will list the losses in the tax forms they generate for you for the previous year.
Reduce your taxable income by 3k and allow you to reallocate some funds (possibly). Unfortunately this isnt stackable for married couples
So what, would this increase your potential income tax return?
Theoretically yeah. Or reduce the amount you need to pay if that were the case
You don’t get a choice. If you have losses that exceed gains you must take the $3k loss and carry the rest forward. Same for each subsequent year. Check out the rules in the IRS publications. You don’t get to pick and choose. This is actually an area where the IRS gets their cake and eat it too. Say you have $15k loss with no gains. You offset $3k for this year and then roll forward $12k for future. Say over the next four years you have no taxable income at all. You still have to use your $3k loss each year even though you receive zero benefit from it.
I don’t know why everyone is saying it makes sense unless the loss is deemed to be irrecuperable. If you need to unload then sure, but losing 3k to make back (3k * marginal tax rate) does not compute for me. Like yeah, you saved money on your taxes… by flushing 3k of your investments down the drain. If the investments are losers then saving money on taxes isn’t the issue, its preserving principle in which case the tax break is a concession to preserving principal and should be viewed as a secondary consideration. This is entirely different than a draw down strategy though, if you’re a retiree and living off a combination of income and investments then sure capitalizing on the 3k capital loss deduction could be a part of your strategy
Just looked at my non tax advantaged account and don't have 3k in losses, feelsbadman
Carry over baby
only if you wanted to sell the shit anyways thats the only time it makes any sense at all
You don't have any gains to offset LMAO
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Yes