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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.

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When harvesting tax losses, short-term capital losses must be deducted against the following, in that order:

  1. short-term capital gains
  2. long-term capital gains
  3. income

Subsequently, in the example the 3000 USD of short-term capital losses must first be deducted toward all the 2000 USD of long-term capital gains (since there is no short-term capital gains), then the remaining 1000 USD of short-term capital losses must be deducted toward my income.


Reference: https://www.investopedia.com/articles/financial-advisors/121914/pros-and-cons-annual-taxloss-harvesting.asp

You should first offset losses for a given type of holding against the first gains of the same type (for example, long-term gains against long-term losses). If there are not enough long-term gains to offset all of the long-term losses, the balance of long-term losses can go toward offsetting short-term gains, and vice versa.

Maybe you had a terrible year and still have losses that did not offset gains. Left-over investment losses up to $3,000 can be deducted against other income in a given tax year with the rest being carried over to subsequent years.

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  • Hi, in this example does it mean no taxes will be deducted on the 2000$ long term capital gain and this implies a 1000$ pending deduction that can be used? – Kiran Baktha Dec 31 '20 at 1:00

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