Tax-Loss/Gain Harvesting

yogibearbull

Tax-loss harvesting is now split.

It's OCTOBER for institutions as the funds are allowed to close books for the year so that they can timely announce yearend distributions in November/December for investors to plan. Some funds still follow the old practice of closing books in December, but then the distributions will be in the next year (2024) with taxes still due in the current year (2023).

It's DECEMBER for retail investors & the market has regular hours on the last day of trading, Friday, 12/29/23.

The last day to DOUBLE-UP & sell the old lot by the yearend is 11/28/23 in order to avoid wash-sale. With commission-free trading, this practice is less popular now. It is easily possible to sell, & simultaneously buy something SIMILAR BUT NOT IDENTICAL.

Edit/Add. To reflect the post on tax-gain harvesting, I have changed the title.

Devo

+1

msf

The bond market will close two hours early (2PM EST) on Dec 29th. Just in case you're looking to dump Treasuries as rates continue to rise. (That's a lighthearted statement, not a prediction.)

Less often practiced, but potentially useful, is tax-gain harvesting. It can be advantageous to generate cap gains and ordinary income in different years. In that way, one can take advantage of lower cap gains rates (e.g. 0% bracket) without getting pushed out by the presence of ordinary income.

Instead of recognizing some gains and some income (e.g. from Roth conversions) each year, one can recognize more gains (fill the 0% bracket) in year 1, and do more conversions in year 2 to compensate. Just watch for all the gotchas - pushing into the next ordinary income tax bracket, exceeding ACA subsidy limits, IRMAA, SS taxation brackets, etc.

It's not unusual to find advice about aggregating tax deductions (property taxes, charitable contributions, etc.) into every other year. It's less common to see similar advice about harvesting cap gains this way. (I believe Kitces' discussion about the interplay between cap gains and ordinary income does have such a suggestion.)

Hypothetical example (MFJ), using same rates/brackets for 2024 as 2023. By keeping all the cap gains in the first year and all the conversions (extra ordinary income) in the second year, nearly all the cap gains get taxed at 0%, vs. 15% in the second year. Even with the "penalty" for lumping ordinary income into year 2 (some is taxed at 22%) one may come out ahead.

This is very income and bracket specific.

			2023			2024
Other ordinary income:	 $70,000		 $70,000
Roth conversion:	 $     0		 $60,000
Less std deduction:	($27,700)		($27,700)
Taxable ord income:	 $42,300		 $102,300
Cap gains:		 $50,000		 $      0

Ordinary income tax:	10% x $22,000+		10% x $22,000+
			12% x $20,300  		12% x $67,450 +
						22% x (102300-89450)
			  =$4,876		 =$13,121

Cap gains tax:		15% x                    
			($92,300 - $89,250)  
			   =$457.50		 =$  0          
			   ---------             ---------
Total tax:		  $5,123.50		  $13,121


With evenly split income/conversions

			2023			2024
Other ordinary income:	 $70,000		 $70,000
Roth conversion:	 $30,000		 $30,000
Less std deduction:	($27,700)		($27,700)
Taxable ord income:	 $72,300		 $72,300
Cap gains:		 $25,000		 $25,000

Ordinary income tax:	10% x $22,000+		10% x $22,000+
			12% x $50,300  		12% x $50,300
			  =$8,236		  =$8,236

Cap gains tax:		15% x			15% x
			($97,300 - $89,250)	($97,300 - $89,250)  
			  =$1,207.50		 =$1,207.50          
			   ---------             ---------
Total tax:		  $9,443.50		  $9,443.50 

Sven

Thank you. It is helpful to see an example.