Short Term Capital Losses

[Catbert]

Any reason I shouldn't harvest as many short term capital losses as possible?  As I understand it, they can offset long term cap gains this year and in following years.  Also up to 3K in ordinary income.

I take Standard deduction and file mfj.  I'll do Roth conversions to bring taxed income up to 250K.  We sold a condo last year and took our time getting that profit into the market.

Edited:  capital losses (not gains).

[secondcor521]

Any reason I shouldn't harvest as many short term capital gains as possible?  As I understand it, they can offset long term cap gains this year and in following years.  Also up to 3K in ordinary income.

Your understanding of the tax rules may not be right, or you may have just mis-typed.

Short term capital gains do not offset long term capital gains.

Short term capital gains are taxed at ordinary income tax rates, and do not receive the same preferential tax treatment that long term capital gains do.

Did you perhaps mean to say short term capital losses?  Those are a different thing.  Many people probably have those this year with the way the market has been.

[Catbert]

Secondcor51 - Yikes, yes I meant losses not gains.

[secondcor521]

OK.  Well there are reasons.  They may or may not apply to you.  In no particular order:

1.  Realizing losses introduces the potential for wash sales, which should be properly understood and managed.

2.  If you realize losses that exceed your gains plus $3K, you'll suffer the economic loss now but will not receive the tax benefit until later, or not at all if you die with a carry forward loss (unlikely you're that old).

3.  The realized gains might be taxed at 0% or a low rate, so may be no strong reason to erase them.

4.  If you like what you own and it's temporarily down, the wash sale rule (see #1) could prevent you from participating in the recovery if it happens to go up a lot in the 30 days after you realize the capital loss.

5.  The STCL might be more valuable offsetting STCG instead.  (Sorta related to #3).

(I'm not particularly fantastic or sophisticated about this sort of strategy stuff, but the above would be things I would think about.  Paging @MDM.)

[MDM]

Tax loss harvesting is a good wiki article.

Assuming it will actually be a tax loss harvest (i.e., selling for a loss while simultaneous buying a similar but not substantially identical investment), then reading between the lines of the OP (i.e., that income might be higher than usual this year due to Roth conversions) taking the paper loss now would make sense.

Of course, if the assumptions and inferences aren't correct, ....

[SeattleCPA]

Assuming it will actually be a tax loss harvest (i.e., selling for a loss while simultaneous buying a similar but not substantially identical investment)...

+1 to everything @MDM says above.

But with respect to quoted portion above, I find myself a little worried when people get jacked about TLH that it's actually a sort of market timing in some cases.

I.e., and not saying this is situation here, but sometimes I get idea that TLH is sort of camouflage for getting out of the market when the situation gets scary. Which is why it's really important to simultaneously buy. As MDM says.

[Catbert]

I'm really not trying to time the market.  I'll sell VTI at a loss and buy FZROX.  The last time I was able to TLH was back in 2008 or so.  I'm actually a buy and hold investor.  In this case I just happen to have put several hundred thousand into the market within the past year (proceeds from real estate and car sale).  The real estate sale was last year so taxes were already paid.

I do understand the wash sale rule (can't buy the same or substantially similar asset within 30 days before or after).  I have to wait until next week to sell any VTI since my last batch was bought ~27 days ago.

Unfortunately, Secondcor521's #2 (death) is not as unlikely as one might think.  That's my solution to an actively managed mutual fund that has way too much unrealized Cap Gains to sell.  Sounds like I should limit realizing capital losses to what will get used up with 5 years or so.

Thanks everybody for being my sounding board.

[MDM]

Heirs' cost basis for inherited shares is the value on the day of death. 

While the heirs don't get to use any loss carry-forward, the value of the inheritance is the same whether one has tax loss harvested or not. 

[ATtiny85]

I'm really not trying to time the market.  I'll sell VTI at a loss and buy FZROX. 

As a reminder, FZROX can only be held at Fidelity (last I heard). That means, should something happen in the future and you want to leave Fidelity, this might be a problem.

Possible reasons? 1. FZROX changes and starts charging a 'large' fee. 2. Fidelity decides to take a vastly different direction and starts charging account fees. 3. Other crazy things... Of course some of those could befell the normal low cost Index funds also.

Low (probably very very very very low) chance of a big problem, but non-zero. I'd only hold FZROX in a tax advantaged account, it's just too new for me.

I try to add this sort of reminder just for continued awareness. Lots of people got hit by Vanguard playing by their rules last year with huge capital gains in whatever TDF style fund.