Related to these two questions. My question is, if I have $1000 in short-term capital gains and, for the sake of simplicity, say I would have to pay a 20% capital gains tax - $200. Is there any reason I shouldn't sell off my worst-performing (this is to mean "they haven't panned out as expected" not "its having a bad quarter and I expect it to rise in the future") stocks until I've reached $200 in capital loss?
I actually do the logic the other way around.
In the account where I do my trading, once I no longer believe an investment can be profitable, I sell it. Similarly, if I have an investment where I believe the future is flat or negative, I'll generally just sell it. It's really about whether you think the investment has potential anymore or not.
By the end of the year if my trading transactions result in a net-negative, I'll trim some winning positions to absorb or partially absorb the losses.
Obviously the best outcome is never have losing trades, but losses are a reality of trading. I wouldn't sell losers to cover offset gains for tax purposes, sell losers because they're losers, and trim winners because you can do so tax free.
I just noticed the math in your question. Simplistically, losses offset gains, then your tax liability is calculated based on your net gain (if any). If you have $1,000 in capital gains, you would need $1,000 losses to reduce your taxable gain to zero. If you have a $1,000 gain and a $200 loss, you would have a net gain of $800 and would still owe $160 in taxes (based on your 20% tax rate assumption).
Yes. If you have investments that you are sure you will make a loss on when you sell them, you should sell them in a year when you also have capital gains.
This is because capital losses can only be offset against capital gains.
So if you have investments that are down $1000 and never going to grow, and you sell them this year (when you have made $1000 elsewhere) then the gains and the losses offset each other, meaning zero total capital gains tax.
If you wait until next year you may find that you have zero capital gains. In this case you don't get the 20%*$1000 refund from the losses. But you still paid your 20%*$1000 in tax this year. Even if you make some gains next year you may find that you have more losses than gains, in which case you still don't get the benefit of the losses.
Your country may allow shifting gains and losses around by a few years, in which case this advice may apply only somewhat.
I would rephrase your statement as "it is advantageous to offset capital losses against gains".
In general, I don't think there's anything to be gained by this strategy.
Yes, by selling a stock that's lost money you can offset your capital gain and so reduce your tax for this year.
But suppose you didn't sell the losing stock this year, and instead sold it next year for the same price. Then you'd have the same loss, and it would reduce your taxes for THAT year. Either way, your combined taxes for the two years would have the same total.
Unless you have some reason why you want to reduce your taxes this year as opposed to next year, I don't see any benefit. I'd see the sale of each stock as a separate decision. Each one is either wise to sell this year or it's not, considering how much it's gone up or down in the past, anticipated gains or losses in the future, how much it would cost you or gain you on taxes ... whatever other factors you may consider.
You may want to think about what your marginal tax rate is likely to be in the future compared to today. Most of us have generally rising income, and therefore tax bracket, from year to year. So it makes sense to take gains sooner, when you'll pay less tax, and losses later, when they'll save you more tax. Well, until you hit retirement, when you're income likely falls sharply. If you're near retirement you may want to postpone gains and accelerate losses.
And of course there may be reasons why you want some cash NOW, like you're planning to buy a house or put your kids through college or whatever.