YATT: Capital loss question

[FP]

Which would be better in this hypothetical tax situation given the following facts...

In the current tax year you have:
1. $6000 in realized capital losses
2. $6000 in unrealized long-term capital gains
3. 33% tax bracket (assume it won't change in the next 5 years)

Here are the two options:

1. "Realize" the $6000 in long-term captial gains which will be negated (in terms of taxes) by the $6000 loss.

2. Leave my gains "unrealized" and take a $3000 loss for the next 2 years?

The way I see it is if I realize my $6000 gains I will only be "saving" 15% (the tax rate of long-term captial gains) of the $6000 (ie $900).

If I just take a $3000 loss for the next 2 years I will be "saving" 33% per year (ie $2000).

Is my thinking correct?

 

[FP]

Bump for the day folks.

 

[CPA]

Can you guarantee the $6000 in gains will be there 2 years from now?

 

[FP]

Originally posted by: CPA
Can you guarantee the $6000 in gains will be there 2 years from now?

No, but let's assume for brevity sake they will be.

 

[FelixDeCat]

Is it time to take the capital gain and match it with your loss? If its a good investment, it might be better to hold on to it and let it grow over the next two years.

If its a fat, bloated (overvalued) pig - sell! $2000 in tax savings today > tomorrow.

If you are itemizing too much with your kind of income you might already be getting hit with the AMT, in which it might affect things. I dont pay AMT so you might want to look into that.

 

[FP]

Originally posted by: FelixDeKat
Is it time to take the capital gain and match it with your loss? If its a good investment, it might be better to hold on to it and let it grow over the next two years.

If its a fat, bloated (overvalued) pig - sell! $2000 in tax savings today > tomorrow.

If you are itemizing too much with your kind of income you might already be getting hit with the AMT, in which it might affect things. I dont pay AMT so you might want to look into that.

Can you explain how cashing out would be a $2000 tax savings today? Wouldn't it just be a $900 savings (15% * $6000)

EDIT: Thanks for the help btw.

 

[FelixDeCat]

Originally posted by: binister

Originally posted by: FelixDeKat
Is it time to take the capital gain and match it with your loss? If its a good investment, it might be better to hold on to it and let it grow over the next two years.

If its a fat, bloated (overvalued) pig - sell! $2000 in tax savings today > tomorrow.

If you are itemizing too much with your kind of income you might already be getting hit with the AMT, in which it might affect things. I dont pay AMT so you might want to look into that.

Can you explain how cashing out would be a $2000 tax savings today? Wouldn't it just be a $900 savings (15% * $6000)

EDIT: Thanks for the help btw.

I simply took $6000 gain * .33 (your bracket - Im assuming this was a short term gain) = $1980. Matching this with your loss = no tax or a $2k savings.

If the asset was held for more than one year then your max tax rate is .15%, which would only be a savings of $990 max. It you think the asset is worth holding, it might be better to get the $2000 over time and then recognize the gain.

The long term rate has caveats, I found some info here: http://invest-faq.com/articles/tax-cap-gains-rates.html

 

[glenn1]

quote:

--------------------------------------------------------------------------------
Originally posted by: CPA
Can you guarantee the $6000 in gains will be there 2 years from now?
--------------------------------------------------------------------------------


No, but let's assume for brevity sake they will be.

Since your premise basically includes a put on the gainer, harvest the gain now to set against your loss and buy back 31 days later (to avoid a wash sale).

 

[FP]

Originally posted by: glenn1

quote:

--------------------------------------------------------------------------------
Originally posted by: CPA
Can you guarantee the $6000 in gains will be there 2 years from now?
--------------------------------------------------------------------------------


No, but let's assume for brevity sake they will be.

Since your premise basically includes a put on the gainer, harvest the gain now to set against your loss and buy back 31 days later (to avoid a wash sale).

Wouldn't the loss be more valuable to me if I simply reduce my taxable income by $3000 for the next 2 years?

FWIW, this couldn't be a wash sale as the stocks that generated the loss are no longer on the market.