Regarding tax-loss harvesting in the United States, https://www.moneyunder30.com/profit-from-tax-loss-harvesting (mirror) mentions some priorities between short-term capital gains and long-term capital gains when tax-loss harvesting short-term capital losses, but doesn't indicate what the priority for income is:
Long-term losses are first applied against long-term gains, and then against short-term gains. Meanwhile, short-term losses are applied first to short-term gains. This sequence takes place because long-term capital gains are taxed at a lower tax rate than short-term capital gains.
When tax-loss harvesting short-term capital losses in the United States and assuming I don't have short-term capital gains, but have long-term capital gains, can these losses be deducted against my ordinary income or does it first have to be deducted against my long-term capital gains (up to 3000 USD in 2020 + leftover losses can be carried forward to future tax years)?
Example for year 2020:
- short-term capital losses = 3000 USD - long-term capital losses = 0 USD - short-term capital gains = 0 USD - long-term capital gains = 2000 USD - income (W2) = 40000 USD
For the year 2020, can I deduct 3000 USD of short-term capital losses solely toward my income? Or do have to first deduct 2000 USD of short-term capital losses toward my long-term capital gains, then deduct the remaining 1000 USD of short-term capital losses toward my income?
Reason to prefer deducting 3000 USD of short-term capital losses solely toward my income: long-term capital gains are taxed at a lower rate than my income, hence deducting income is financially preferable to deducting long-term capital gains.