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Let's imagine Juanita. Juanita pays taxes in the USA.

Juanita bought equity XYZ on January 1 and sold it for a profit of $100 a month later. Thus, it was short-term gain.

Juanita also bought equity CRAP on January 1 for $100. Now, let's say it's December 1 of the same year, and CRAP is worth only $25.

If Juanita no longer has confidence in CRAP as an asset, does it make sense for Juanita to sell CRAP before January 1 rolls around again so that her $75 loss on CRAP gets deducted from her short-term gains instead of waiting another month to sell CRAP, when it will be deducted from her long-term gains (the following year)?

Let's not make things too complicated and assume Juanita always has some short-term and long-term gains from which to deduct losses. Let's also assume that Juanita's short-term capital gains are taxed at a higher rate than her long-term capital gains, which I think is true in most, or maybe even all, situations.

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If there is only one type of capital loss being carried over, it can be used to offset the current year capital loss regardless of it is for a short term or long term capital loss. And if the loss is significant, one can also deduct a maximum loss of $3,000.

The overriding decision should be that if you no longer have any confidence in CRAP, it should be sold immediately for $25. Why risk $25 for potential tax savings of pennies?

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  • Let's assume Juanita has no loss carryover each year. Basically, the choices are to sell it as a short-term loss and deduct it from short-term capital gains, or wait until the equity has been held for a year and then deduct it from long-term capital gains. Since short-term capital gains are taxed at a higher rate, it seems obvious to deduct it from short-term capital gains. But maybe it's not so obvious (or is an erroneous conclusion), as it doesn't seem to be mentioned often.
    – Definitely Not Juanita
    Jul 13, 2021 at 12:12
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    If Juanita no longer has confidence in CRAP as an asset, it makes more sense to sell CRAP. Period. More market mistakes are made by worrying about taxes rather than principal at risk. CRAP can go to zero.
    – Bob Baerker
    Jul 13, 2021 at 12:21
  • Of course, but I'm interested learning about the answer to this question from a tax perspective. Let's isolate the issue and ignore the possibility of CRAP going up or down in value or confidence in it, and just focus on the tax issue.
    – Definitely Not Juanita
    Jul 13, 2021 at 12:26
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    @DefinitelyNotJuanita The point is that focusing on tax instead of the underlying asset isn't the correct way to do things. You said in your post that Juanita 'no longer has confidence' in CRAP. That is the determining factor - holding onto a risky asset to attempt to move the needle on the tax impact is just asking for trouble. It is also known as 'letting the (tax) tail wave the (investment) dog'.
    – Grade 'Eh' Bacon
    Jul 13, 2021 at 14:58

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