Howdy folks,
Hope your holidays are going great.
Now is your last chance to do some tax trades for the year and capture some losses. With funds it's very easy to avoid having to deal with the '30 day wash' rules. The Blue Meanies say you can't sell a particular security and buy it back in less than 30 days in order to capture a loss for taxes.
That's OK. You can sell one Equity Income mutual fund now and buy a different EI after the tomorrow. Not a problem because they are not the same security. Where you get caught is selling JPM today and buying JPM within 30 days. Funds are neat because while being essentially very similar but not the same security.
Now, I am going to venture a guess and opine that we've all got some losses during 2011. Why not use them to your tax advantage.
peace,
rono
Comments
As to tax implications - it appears it would be a short term loss. (There is an obscure rule about fund shares held less than six months that can turn short term losses into long term losses; that doesn't apply here as you've held the shares more than six months, but under a year.)
The best situation would be if you had short term gains that this short term loss would offset. Short term gains are taxed as ordinary income, so offsetting them has the most value.
If you don't have short term gains to offset, then these losses could be used to offset long term gains. That's not as valuable, because long term gains are taxed at a much lower rate (15% or less). If you expect long term gain tax rates to go up (say, to 20%), and you'll be selling in a few years, it might make sense to retain the higher cost basis (by not selling), and take a smaller gain in the future (so you'd be saving yourself 20% in the future, vs. saving yourself 15% now). Depends on your crystal ball.
If you don't have any capital gains to offset (neither long nor short), then up to $3,000 of losses can be used to offset ordinary income. In this situation, short term loss is used toward that $3,000 max; if that's less than $3,000, long term losses are also used toward that $3,000 max. In this situation, you're not getting any special benefit from the losses being short term, because long term losses could just as easily be used to offset the $3K of ordinary income.
Here are a few quick examples:
Ordinary income: $80K
Short term losses: $5K
Long term gain: $7K
In this situation, the short term losses are applied to the long term gains, leaving you with a net $2K in long term gain, plus the full $80K in ordinary income to be taxed.
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Ordinary income: $80K
Short term losses: $5K
Long term gain: $1K
In this situation, the first $1K of short term losses is applied against the long term gain (leaving you no net long term gain to be taxed); the next $3K of short term gain is used to offset the ordinary income (leaving you $77K of ordinary income to be taxed). The final $1K of short term losses is carried over to next year's tax return.
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Ordinary income: $80K
Short term losses: $5K
Long term losses: $3K
In this situation, the first $3K of short term losses is used to offset the ordinary income (leaving you $77K of ordinary income to be taxed). The remaining $2K of short term losses are carried over to next year, as are the $3K in long term losses.
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Ordinary income: $80K
Short term losses: $1K
Long term losses $6K
In this situation, first the short term losses are used to offset the ordinary income. Since that's under $3K of losses, you can use another $2K (for a total of $3K) from long term losses to offset the ordinary income. That leaves you with $77K of ordinary income, no short term losses, and $4K of long term losses carried over to next year's return.
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Ordinary income: $80K
Short term losses: $1K
Long term losses: $1K
In this situation, all the losses combined are less than $3K, so they're all used to offset the ordinary income. That brings the ordinary income down to $78K, and there are no losses left for next year.
Short term losses can offset the short term gains (which as you note are taxed at a higher rate, so this saves you more money). Long term losses would only be used to offset the long term gains. So there can be a difference between long term and short term losses, as far as taxes are concerned. (Again, this all assumes you have both long term and short term gains that year.)
For example:
Security 1: sold for $2K short term gain
Fund 2: distributes $2K capital (long term) gains
Fund 3: sold for $3K short term loss
The $3K loss is applied first to the short term gain (wiping it out); the remaining $1K in losses is applied to offsetting the $2K long term gain. That leaves a $1K long term gain. At 15% tax, your tax is $150.
If, on the other hand, Fund 3 were sold for a $3K long term loss, then that loss would be applied first to the long term gain (wiping it out); the remaining $1K in losses is applied to offsetting the $2K short term gain. That leaves a $1K short term gain. At 25%, your tax is $250.
So there can be a difference between a short term loss and a long term loss.
Please keep in mind that it is quite likely some of your other funds have (or will have) capital gains distributions (like Fund 2 above), even if they lost money this year. Your losses on the sales you're proposing would go first to reduce those gains, and only if there were any excess losses remaining, would they be applied against ordinary income (up to $3K in losses).