What should one do with excess capital losses?

Suppose I need to sell some stock to fund a down payment on a house, and I have long term gains, short term gains, and long term losses to choose from. From what I understand, it's best to sell the short term capital losses first. What are the pros and cons of the following 3 options?

Option 1. Sell short term capital losses to fund the down payment. Don't sell anything else. Use $3000 of the capital losses to reduce my tax bill and carryover the rest into future years.

Option 2. Sell short term capital losses to fund the down payment. Sell short term capital gains until I reach net gains of 0, and reinvest those proceeds in the same stock, effectively resetting its cost basis to be lower. Is this essentially tax-gain harvesting? Normally I wouldn't be interested in tax-gain harvesting, but maybe it would make sense if I have capital losses to spare.

Option 3. Sell only enough to pay for the down payment, but use a mix of short term gains and losses to have net 0 gains.

What is generally the best option in this situation?

2 Answers 2


Obviously tax should not be the only consideration here. You should consider this as an opportunity to re-balance your investments.

But I'll analyze your options here purely from tax perspective, without any other consideration. There's no single answer, but I'll provide some data points for you to consider.

Option 1:

You'll essentially harvest the losses (you only have short term), and then use them to reduce your ordinary income. This is useful if your ordinary income is in the high(er/est) brackets, since you'd be getting the most tax benefit. If you have significant carry-overs, that would mean that you would benefit the most if your future years also have ordinary income in the high(her/est) brackets. Also, you're assuming your carryover is small enough for you to be able to use it up on ordinary income quickly (otherwise the time value of the money comes into play). If these assumption (about the future) don't hold, then this strategy is probably not the best.

Option 2:

You're reaping the full tax benefit right now. You're harvesting all your short term loss and enough of the short term gain to offset it. You probably meant that you'd be resetting the cost basis of the sold stocks to higher, not lower (that would be wash sale). This is, again, most beneficial for those who are in the high(er/est) tax bracket, but not as much since had you not sold the gain - it would become long term gain relatively soon and you'd get tax benefit just by holding it. You're resetting the clock on the re-acquired shares and will have to hold them another year to benefit from preferential tax treatment. It would be your preferred option if you have significant losses that would take long time to write off in $3K increments. But then again, you don't have to do gain harvesting now, you can do it later and continue offsetting from the carry-over (but you may end up harvesting long term gain and offsetting the short term carryover, which would diminish the benefit somewhat).

Option 3:

This option makes sense if you're currently in lower/mid tax brackets, since in this case your ordinary income (and short term gains) and long term gains would be taxed at relatively similar rates, similar enough not to want to deal with long term carry-overs.


The short answer would be that assuming that you can benefit from the $3k deduction, you want to find a combination of sales of positions that:

(1) Provides you with the cash needed for your down payment

(2) Gives you the largest deductible loss up to $3k

(3) Resets the cost basis of the largest dollar amount of shares with gains

(1) and (2) are of primary importance followed by (3). Note that (3) will reset the holding period of your stocks which may or may not be important to you.

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