Many investors are considering TLH to book losses to offset gains or to just carryover losses into future years (they never expire).
Here is another tax strategy for capital gains in this good year 2024.
Book gains and fund DAF with those gains (better with comparable value in-kind). You will get full tax deduction on Itemized Schedule A for 2024. There will be no net effect on taxes. Trick is to consolidate other deductions so that you itemize instead of taking standard deduction in 2024. Only 2 weeks left to implement this.
For those who would like a quick refresher on DAFs, here is my article in a local e-paper,
https://indoustribune.com/business/finance/donor-advised-funds-dafs/
Comments
I'm confused about what you mean by "book gains". Also, it doesn't look like net effect on taxes comes out to zero.
I'll make this concrete. $40K cost for stock, $64K present value, 15%/22% tax bracket (cap gains/ord. income).
Scenario 1: Liquidate all, donate $24K gain ($24K deduction)
cap gains tax = 15% x $24K = $3.6K
ordinary tax savings = 22% x $24K = $5.28K
net tax = -$1.68K
Scenario 2: Donate $24K gain in kind, liquidate rest ($40K)
cap gains tax = 15% x 40/64 x $24K = $2.25K (less because you don't sell all)
ordinary tax savings = 22% x $24K = $5.28K
net tax = -$3.03K
Donating securities directly usually comes out better than selling and donating proceeds. The tax savings above assume that one gets the full benefit of itemizing the contribution.
One benefits (gets a higher deduction) only to the extent that itemized deductions exceed the standard deduction. So if a $10K contribution pushes itemized deductions just $4K over the std deduction amount, one gets only $4K in increased deductions, not the full $10K.
As you noted, the trick is to bundle deductions. That way, instead of losing some deduction value in reaching the std deduction amount each year, one reaches the threshold this year and then keeps adding. DAFs are an excellent vehicle to do this.
Remember, $64K with large unrealized gain does have higher market risk.
Actually, a 3rd scenario (variation of #2) can be constructed so that you donate some in-kind to DAF and cash the remainder so that the net tax impact is zero. And you end up with the combo of cash in your hands plus a good chunk in DAF to soft-manage.
Money in the DAF is out of your estate.
There are also income limitations for DAF contributions,
"Overall deductions for donations to donor-advised funds are generally limited to 50% of your adjusted gross income (AGI). The limit increases to 60% of AGI for cash gifts, while the limit on donating appreciated non-cash assets held more than one year is 30% of AGI. The IRS permits a carryover for five tax years, should your charitable deduction exceed AGI limits in a given tax year."
https://www.schwabcharitable.org/non-cash-assets/publicly-traded-securities
https://www.schwab.com/learn/story/tax-smart-ways-to-gift-highly-appreciated-assets?cmp=em-XCU
As a loophole, it works with appreciated assets that you plan to hold for a few more years. Gift them to your 90 year old grandparent or parent, or for that matter any elderly person you trust with money. Have them bequeath that asset back to you in their will or via a TOD account.
Presto, in a few years the capital appreciation tax liability has vanished and you have your assets back intact. It doesn't seem all that proper to me, but it also doesn't seem to be illegal. As Schwab writes, the assets can be left to any "selected beneficiary". That means even you.
It's not quite as efficient as the way an ETF dumps appreciated assets onto authorized participants. But it is similar in spirit - use a straw man of sorts who has a way to make the tax liability disappear.