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Let's say I bought 100k worth of a stock a long time ago. Over the years, I've received (and paid income tax on) 50k in dividends. The stock tanks, and my shares are now worth only $50k. I decide to sell all my shares in 2023, incurring a $50k capital loss. I've basically broken even on my investment ($50k dividends - $50k capital loss), but I've already paid taxes on the dividends, so I need to recoup the taxes on the capital loss.

In 2023, I sold no other stock other than the aforementioned one, so there are no capital gains to offset this year. I deduct the allowable $3k from ordinary income and have $47k in capital loss carryover.

At the end of 2023, I retire, so for 2024 I have no earned income. I think this is a great opportunity to do some tax gain harvesting while I'm in the 0% capital gains bracket. I sell some other stock, incurring $50k in capital gains. I'm married filing jointly, so that keeps me within the 0% capital gains bracket.

But wait... I also have this $47k capital loss carryover from 2023.

Will the IRS:

A) Use up my $47k capital loss carryover against my $50k capital gains, even though I wouldn't have had to pay tax on the capital gains anyway, effectively "wasting" my capital loss carryover?

or

B) Since the capital loss carryover is "of no use to me" this year, continue to carry it forward to future years?

If the latter, are there any strategies to take advantage of the 0% capital gains rate without wasting my capital loss carryover?

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  • What are you going to do with it in future years? Unless you come out of retirement, you're probably never going to get out of the 0% bracket.
    – Barmar
    Jul 29, 2023 at 16:47
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    @Barmar depending on OP's situation, a combination of RMDs, taxable Social Security, pension distributions, annuity payouts, etc. could push them out of the 0% capital gains bracket.
    – Stan H
    Jul 29, 2023 at 17:02
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    "but I've already paid taxes on the dividends" And fully realized the benefits of that cash in those years. That's the qualitative difference, and why the IRS focuses on "taxable events", not necessarily your profit and loss.
    – user26460
    Jul 29, 2023 at 21:23

2 Answers 2

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If the latter [I think you meant "former" here], are there any strategies to take advantage of the 0% capital gains rate without wasting my capital loss carryover?

Sure, harvest more (assuming the year is not yet over). If you harvest $163,950 gains while having absolutely no other income, it would use up your $47,000 carryover, $27,700 standard deduction (add $3000 if both over 65), and your $89,250 zero% bracket. (The numbers will presumably be a bit higher in 2024 due to inflation adjustments).

Or, change your perspective. Why is the carryover being wasted? You might as well say the carryover is used, and the 0% bracket is wasted. But unless you are quite rich you will likely have a lot of years where the 0% bracket is wasted, why fash yourself about this one particular year?

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No, you cannot pick and choose what year to use your carried loss. Even though you're in a different tax bracket, you'll still use it. The fact that the value of the tax benefits changes year from year is irrelevant.

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