Is short term capital loss worth more than long term capital loss?

Question

Let's say someone has already realized a lot in short term and long term capital gains for a given year.

And the same person has also unrealized short term capital loss that will turn into unrealized long term capital loss the next day.

Would it be wiser for this person to realize loss while it is short term cap loss to pay less in tax instead of waiting for it to become long term cap loss?

Also, in similar scenario, but for someone who has already unrealized long term capital loss position, is it possible to somehow reset the duration back into short term loss by hedging that position with options or performing wash sale?

Answer 1

Let’s take a specific example:

Suppose you have $5000 in short-term gain and $5000 in long-term gain, and other income that puts you in the 22% tax bracket.

If you realize $3000 in long term losses, the tax on capital gains will be $1400. (5000 x 22% + 2000 x 15%)

If you realize $3000 in short term losses, the tax on your capital gains will be $1190. (2000 x 22% + 5000 x 15%)

Whether it’s “wiser” or not depends on many other factors, though.

In various tax brackets, the difference varies from 0% to 17%. The brackets where the difference is largest are the single 32% bracket, where long-term gains rate is 15%, and the low end of the 35% bracket, where the long-term capital gains rate is 18.8%.