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Cap Gains Loss Harvest Strategy advice please

I own a TROWE Mutual fund in a taxable account that has huge gains, ( I have held it for a long time ) it has grown to become very concentrated, but would be a huge tax hit to unwind . There are several individual distributions that are negative, both Long Term and Short term which I can sell to harvest the losses to use against other capital gains. That would increase gains in the holding, and exacerbate the eventual unwinding of this position - unless it is donated . What is the smart thing to do here ?
I'd like to be aware of unintended consequences. I am still working , so in a higher tax bracket .

Comments

  • edited November 18
    Charitable contributions is a valid idea. Use DAF to contribute right away but dole out contributions later; great if you can itemize.

    Repositioning portfolio to take some gains and using TLH for offsetting those is also a good idea.

    I am not seeing any unintended consequences. There is also a thread on Tax Ideas.
    https://www.mutualfundobserver.com/discuss/discussion/60253/timely-tax-ideas-from-barron-s-this-week
  • I am selling those with negative cost basis (preferably all long term cap gain) but we don’t have many despite a poor year. Quickly we buy the equivalent ETFs to avoid future headache.

    Donation is always good at this time.
  • Sven, why preferably long term? I know typical capital gains are long term but I think the IRS lets us use remaining short terms capital losses to offset long term capital gains on schedule D once the short term losses have offset short term capital gains. I am not certain about this and that is why I am hesitating to harvest a capital loss in a fund I have held for less than a year. There will not be much short term gain for me this year and I know I can use "left-over" losses in subsequent years to offset gains but I'd rather use them *this* year.
    Sven said:

    I am selling those with negative cost basis (preferably all long term cap gain) but we don’t have many despite a poor year. Quickly we buy the equivalent ETFs to avoid future headache.

    Donation is always good at this time.

  • I am very sure that only short term loss can offset short term gain. Same goes for long term gain and loss.

    The long term capital gains tax rate is 0%, 15% or 20% on most assets held for longer than a year. Short term capital gains taxes on assets held for a year or less correspond to ordinary income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% or 37%.
  • Sven said:

    I am very sure that only short term loss can offset short term gain. Same goes for long term gain and loss.

    The long term capital gains tax rate is 0%, 15% or 20% on most assets held for longer than a year. Short term capital gains taxes on assets held for a year or less correspond to ordinary income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% or 37%.

    This is what other people tell me as well. Yet schedule D and its instructions seem to indicate otherwise and so do some fairly reliable websites. Here is one quote from kiplinger.com:
    "Netting Rules. If you have a mix of short- and long-term capital gains and losses, you need to understand the order in which losses offset gains. First, short-term losses are used to offset short-term gains, and long-term losses are used to offset long-term gains. Then, if there are any losses remaining, they can be used to offset the opposite type of gain."

    Elsewhere it is made clear that there is a $3000 yearly limit (married filing jointly) to what can be deducted per year from capital gains.

  • edited November 19
    Not sure these are good ideas
    I am also not CPA NOR tax expert

    What about creating LLC and defined benefits distribution (if you have small business only family memebers up maxinum tax deferred ~ 250k per yr for husband and 250k for wifey) then roll over to this acct.... Don't really need to sale since may expect rebounds in 12-36 months.

    If you don't need these monies then Hold until 64.5 yo. My old advisor from Edward Jones told me to roll it to retirement acct and control your yearly Rmd Outputs once 64.5 yo, take only what you need for living and travel (If you don't need monies then leave it until 64.5 yo) ... Everything is probably paperloss for now if you don't sale. Tax expected very little this year because most portfolio are 20-40% down (unless you are Michael Burry and gained so much this yr w short term trading)

    Other options maybe Give to kiddos family think max life time gifts 11 millions limited tax paid but need filed by cpa (know Irs loopholes) but maybe lots headaches + hefty fees

    Pls consult w tax advisor and financial advisor before taking actions and play w turbo tax first before choosing wisely.


  • By question, why isn't the $3000 cap linked to inflation ?!
  • msf
    edited November 19
    There are lots of numbers in the tax code that aren't indexed to inflation. ISTM that automatic (as opposed to manual) inflation adjustments are a fairly new concept, given that the modern tax era (16th Amendment, first 1040) started in 1913. Why, for example, is the IRA catch-up amount fixed at $1,000? The proposed SECURE 2.0 Act (H.R. 2954) would index this figure for inflation, as well as raise the RMD starting age above 72 and a slew of other changes.

    Here are some other aspects of this $3000 tax benefit that one might question:

    - Why allow a capital loss to offset ordinary income, as opposed to treating the loss as a negative cap gain (i.e. get back 15% in taxes on the $3K instead of, say, 22% in taxes)?

    - Why allow individual taxpayers to carry over cap losses indefinitely? (Until 2011, mutual funds could only carry forward cap losses eight years.)

    - Why did H.R. 1619, sponsored by Zoe Lofgren in 2001-2002 fail to reach a vote? It would have amended "the Internal Revenue Code to increase, from $3,000 to $8,250, the annual capital loss limit applicable to individuals [and provided] for an annual inflation adjustment."
    https://www.congress.gov/bill/107th-congress/house-bill/1619

    - Why should one have to hold a security for a full year before treating the gain or loss as long term? Through 1976, the holding period was 6 months, then 9 months in 1977. The Tax Reform Act of 1976 changed not only the holding periods, but the amount of loss carry forward permitted, from $1K in 1976 to $2K in 1977, to its present $3K in 1978.
    https://www.everycrsreport.com/reports/98-473.html

    These are not rhetorical questions. Virtually every piece of legislation involves horse trading and compromise. One needs to delve into the legislative process to find out what happened. Likely there will be another opportunity in the next couple of months to watch the process in real time, as SECURE Act 2.0 is raised in the lame duck session. Or not.

    https://news.bloomberglaw.com/daily-labor-report/landmark-retirement-bills-see-opportunity-in-lame-duck-congress
  • Thanks y'all.
    My understanding is > 1. Capital losses that exceed capital gains in a year may be used to offset ordinary taxable income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.

    2. My specific question is > some for the distributions show as at loss - others are at a gain . I can identify and cherry pick and sell off a few of the distributions that are currently at a loss . This would then raise the gain of the remaining position . Is that still an advisable thing to do ?

    The only way to avoid the cap gains on liquidation would be a gift or DAF - this fund throws off huge year end Cap gains distributions and as I have owned for about 25 years - it has huge embedded gains .
  • Ben
    edited November 19
    @newgirl: If I understand your question correctly you are contemplating selling shares of *one* mutual fund. If you set up your cost basis method as average cost basis you will not be identifying specific shares to sell, but just the number of shares or the number of dollars. Everything is averaged-out so to speak. This is what I have done and it has worked well for me. When I eventually sell the entire lot of shares I have found that the capital gains do not come close to the amount of money I have actually made in the investment. But maybe I don't understand the question.

    Part of what I don't understand is what you mean by a negative distribution. As far as I can tell, the NAV will drop whenever the mutual fund sells assets, no matter whether they sold the asset at a profit or loss.
  • @ben - If I understand it - I can identify and choose to sell specific shares that are now showing a loss. Most of the dividends are showing as a a gain , but some are showing a loss . If I sell the dividends that are showing the loss the average total Capital gain in the fund will increase, when I go to sell the remaining share s.
  • Maybe she is trying to say, the dividends were used to buy more shares & as of recent movement in the markets they show the buys as negative. Just my two cents.
  • 2. My specific question is > some for the distributions show as at loss - others are at a gain . I can identify and cherry pick and sell off a few of the distributions that are currently at a loss . This would then raise the gain of the remaining position
    When specific shares ("cherry pick") and average cost ("raise the gain ... of the remaining position") appear in the same sentence, it suggests that some clarification might be helpful.

    It is true that if one sells the most expensive shares in a position, the average cost of the remaining shares is reduced, thus increasing the average gain of those remaining shares. But so what?

    ---

    Consider a position with two shares, one purchased at $2/share, one purchased at $6/share (perhaps via div reinvestment). The average cost is $4/share. If the current price is $5, then what one has is:

    - Share A, cost $2, worth $5, unrealized gain of $3.
    - Share B, cost $6, worth $6, unrealized gain (loss) of -$1.

    Total unrealized gain = $3 - $1 = $2.
    Average unrealized gain = $2/2 = $1. As shown below, this average gain doesn't matter.

    ---

    Suppose you sell one share now, and the other share later after the price rises from $5 to $8.

    Sell Share B first, recognize a $1 loss.
    Sell Share A @$8, recognize a gain of $8 - $2 = $6.
    Total gain on portfolio = -$1 + $6 = $5.

    Sell Share A first, recognize a $3 gain.
    Sell Share B @$8, recognize a gain of $8 - $6= $2.
    Total gain on portfolio = $3 + $2 = $5.

    No difference in total gain. The difference is in the timing. Sell B first and you get to use a $1 loss now (offsetting other gains). You don't have to pay taxes now out of pocket. So you get the use of that tax money until you sell Share A.

    Sell A first, and you have to pay taxes on $3 of gain now. You don't have the use of that tax money any more. This is why one generally sells more costly shares first.

    ---

    Don't get confused by average cost. With mutual fund shares, one is permitted to use the average cost of shares when computing realized gains. But then there's no cherry picking, no selling of most expensive shares first. And total gain still comes out the same.

    With average cost:
    Average cost = ($2 + $6)/2 = $4.

    Sell oldest share first (required) @$5: recognize gain of $5 - $4 (av cost) = $1.
    Sell newest share @$8: recognize gain of $8 - $4 (av cost) = $4.
    Total gain on portfolio = $1 + $4 = $5.

    Notice that the average cost used doesn't change for the second share, even though there's only one share left in the portfolio after the first sale.

    And the total portfolio gain of $5 is the same as before. The difference, once again, is in the timing. You pay taxes on $1 gain now. That's more than you'd have to pay up front if you used the shares' actual costs and sold the most expensive share (Share B) first.

    ---

    Finally, to get back to the idea of using $3K in losses to offset ordinary income. This is the most valuable use of losses. It's more valuable than using a loss in one share to offset the gain of another share. So if there is a way to generate a cap loss one year, that's usually optimal. To do this, you usually sell your most expensive shares in one year and your shares with gain in other years.

    Again, the total gain remains the same regardless of the order of selling. What differs is when you have to pay your taxes (generally the later the better) and whether you get to use some losses to offset ordinary income (better).


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