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This year the market has been volatile and my portfolio has hardly gained. I was forced to sell some stock earlier to buy into another investment opportunity and chose to sell two stocks that had substantial losses. Right now my capital losses are in the $3,000 - $5,000 range (I haven't figured it out exactly yet).

I've never had net capital losses in a year before. How do I best apply them to my taxes for 2016? Does it make sense to sell stocks that are currently positive and repurchase them immediately, so that the cost basis is brought up to current value and any taxes on that gain are offset from my losses?

Assume that these stocks have all been held more than one year. Also assume that I have no income and thus no personal income tax to offset with these losses. I also have no depreciation of property.

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    Beware of the wash sale rule! Investopedia link – Codes with Hammer Oct 26 '16 at 13:16
  • After rereading the question, I think that this is the first time I've seen someone suggest a wash sale situation on a capital gain. I'm very curious to see the answers. – Codes with Hammer Oct 26 '16 at 13:20
  • @Codes with Hammer I don't believe wash sale rules apply to gains, only losses. – homer150mw Oct 26 '16 at 13:31
  • This is a very tactical topic. Do you otherwise have employment income, or are you retired/living off investments? Do you live in a state that allows capital loss carryovers from year to year (following the IRS) or not? You can carry over losses from year to year, and each year deduct 3000 from your regular income, which depending on your income could be a couple hundred bucks better for you than bringing up capital basis. There are cases where this is less advantageous (thus my clarification questions above) – user662852 Oct 26 '16 at 13:43
  • Unsure if this applies to the poster, but note that the $3,000 deduction mentioned above becomes only $1,500 if you have MFS filing status. – Scott Dudley Oct 26 '16 at 13:47
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You have multiple issues buried within this question. First, we don't know your tax bracket. For my answer, I'll assume 25%. This simply means that in 2016, you'll have a taxable $37,650 or higher.

The interesting thing is that losses and gains are treated differently. A 25%er's long term gain is taxed at 15%, yet losses, up to $3000, can offset ordinary income. This sets the stage for strategic tax loss harvesting. In the linked article, I offered a look at how the strategy would have resulted in the awful 2000-2009 decade producing a slight gain (1%, not great, of course) vs the near 10% loss the S&P suffered over that time. This was by taking losses in down years, and capturing long term gains when positive (and not using a carried loss).

Back to you - a 15%er's long term gain tax is zero. So using a gain to offset a loss makes little sense. Just as creating a loss to offset the gain. The bottom line? Enjoy the loss, up to $3000 against your income, and only take gains when there's no loss. This advice is all superseded by my rule "Don't let the tax tail wag the investing dog." For individual stocks, I would never suggest a transaction for tax purposes. You keep good stocks, you sell bad ones. Sell a stock to take a short term loss only to have it recover in the 30 day waiting period just once, and you'll learn that lesson. Learn it here for free, don't make that mistake at your own expense.

  • Also, the capital loss can be carried forward indefinitely, offsetting future gains and $3000 per year until it's been used up. – Pete Becker Oct 26 '16 at 15:49
  • Yes, but for long term gains, that's bad. At 15% bracket, gain was free, so the $3000 is lost each year. Please re-read my answer, I was trying to make a specific point about the difference in treatment of gain vs loss. – JoeTaxpayer Oct 26 '16 at 16:02
  • In this case remember that there is no other income, so if there's no capital gain to apply the capital loss to, the $3k is either lost or carried over. I thought that only losses over $3k could be carried forward, so wouldn't using that loss to increase the cost basis of an existing security help 30 years down the line when that security is sold to provide livable income? I may be missing something; this is a new situation for me. – Nicholas Oct 26 '16 at 20:16
  • Thanks for pointing that out. I wrote too generic an answer. You have the loss as well as the standard deduction to offset gains plus the fact that a 0-10%er has a zero cap gain rate. – JoeTaxpayer Oct 26 '16 at 20:22
  • If you have a loss carryforward, IIRC you are required to take the $3,000 ($1,500 MFS) deduction from income every year until it's gone, depleting your carryforward even if that deduction doesn't change your bottom line. So, if the OP doesn't expect ordinary income in future years, it's worth thinking about this too. – Scott Dudley Oct 26 '16 at 21:49

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