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I am young and in a low income bracket. Due to the current economic climate, I've realized a large amount of losses and also have an atypically large unrealized gain.

I could sell (and re-buy) either some of my short-term winners or my long-term winners in order to avoid having to pay taxes on the winners in a later year when I may not have a big capital loss write-off and I may be in a higher income bracket.

Also, I don't itemize.. I don't think this is relevant, but just in case it is.

Does this seem like a good idea? Why or why not?

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  • Couple of points: 1) what you're describing sounds like it would be classified as a "wash sale" so you wouldn't be able to deduct this year (you'd be able to deduct it when you sold the be-bought shares), 2) tax brackets, as well as profits and losses for the entire calendar year are considered for tax purposes, so whether you realize a loss now or later in the year is irrelevant.
    – D Stanley
    Jul 21, 2020 at 18:06
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    The OP is considering selling long and short term winners so there would be no wash sale violation from that. The only way it could be a WSV would be if his losses were in the same stocks and they occurred within 30 days of buying replacement shares after the date of the loss.
    – Bob Baerker
    Jul 21, 2020 at 18:33

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I think that it's a good idea to harvest gains when you have losses in order to reduce current or future taxation. And even if you didn't have those losses, booking the gains in low income years has merit as well. Because my income is highly variable, I incrementally cashed out a chunk of my IRA in low income years because at some point the RMD withdrawals will become mandatory (I'm much older than you and closer to that).

There are some potential gotchas in your strategy. If your losses were in the same stocks that you have open positions in with gains, you would have to make sure that you did not sell the gainers and buy them back within 30 days of the realized loss because that would trigger a wash sale violation, forcing you to defer the losses.

Another consideration is that you are limited to a $3k capital loss per year so if your 'large amount of losses' exceeds that, you would not get the benefit of them this year. In fact, they would be of little to no benefit because you indicated that you have a low income and the $3k deduction would be wasted. So it would make perfect sense to use up as much of the realized losses as possible.

The only other drawback that I can think of is that if you sell your short term winners and buy them back, you lose the 'time in' towards the one year long term gain status. I don't see this as a big deal if the holding period has been a few months and the tax savings (assuming a higher future tax bracket) is significant. If only a few months away from LTCG status then maybe not.

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Yes. Capturing gains to offset the losses makes sense, for you.

But. Keep in mind, long term capital gains can be taxed at 0%. But the losses can go against ordinary income, so even at 10%, you might benefit. If the gains were short term, and you want to sell anyway, no problem. But churning the stares just resets the clock, so I’d analyze the situation carefully.

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