Tax Loss Harvesting Bad for PP?

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tomfoolery
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Tax Loss Harvesting Bad for PP?

Post by tomfoolery » Thu Sep 24, 2020 10:44 am

Tax loss harvesting is selling a position at a loss, locking in the loss, and rebuying a similar but non identical security. This avoids IRS wash sale rules and keeps you market neutral. For example, sell GLD and buy IAU is similar but non identical. Th benefit to realize an immediate tax benefit at the expense of a higher future taxable gain. Since saving $1 in taxes today is worth more than paying an extra $1 in tax in the future, this is generally a fantastic strategy.

I always thought this would be good but I was never in a situation to use it until now and I’m questioning if it works for the PP, specifically gold.

Since gold ETFs are taxed at collectibles gain rates, it may be beneficial for me to maintain the same gold ETF with the loss until I actually need to sell. Otherwise, I lock in a $15k loss now in 2020, which only allows a $3k annual carry forward of loss, which lasts 5 years, but I expect to need a lot of cash next year to buy a house and if gold rises in 2021, I’ll have a large taxable gain that’s collectible tax rate and I can only reduce it by $3k from the carry forward.

So it seems like for gold at least, it makes sense to not tax loss harvest unless you have other gold gains in that same calendar year to offset.

For example if In February you have a $20k gold etf gain that’s taxable and you sold the position, and in November of same year you wind up with a $20k loss, then do a tax loss harvest in November and have a net zero taxable gain.

But if you have no gains that calendar year, and take a $20k loss, then the following calendar year have a $20k taxable gain (because you had to sell for cash), you screw yourself by having to pay collectible tax rate on $17k since only 3k per year carry forward is allowed.

This is even assuming carry forward losses allow you to reduce the collectible tax rate, which I think it does but I’m not sure.

Also, it seems to make sense to tax loss harvest stock and bond holdings in a year when you realize a gold gain to offset the collectibles tax. Because I believe if you have a $20k loss in SPY and realize a $20k gain in GLD, then your schedule C will net zero and no collectibles tax is due. If I’m correct here, it may make sense to delay tax loss harvesting bonds or stocks into a year when you can tax loss gain gold.
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Re: Tax Loss Harvesting Bad for PP?

Post by Tyler » Thu Sep 24, 2020 11:13 am

If I'm understanding your argument correctly, I think you're misunderstanding the tax treatment.

Yes, gold is taxed as a collectible. That just means that 1) it is taxed as ordinary income with no preferential long-term rates, and 2) the tax cap is 28% even in the highest tax brackets. But (to my knowledge) it does not affect how tax loss harvesting and carry-forward losses work.

Sell gold at a loss, and you can use that capital loss to offset capital gains in other assets like stocks and bonds (and vice versa). Any excess losses can be carried forward just like any other asset. The 3k limit only applies to income (earned income, dividends, interest), not future capital gains. So any future capital gains from any asset can be fully offset by any capital losses you have carried over on the books with no 3k limit.

I'm not sure where you're getting the idea that the rules for gold carry-forward deduction limits are different than that for any other asset. Do you have a source for that?

BTW, if you happened to be audited I'd be surprised if the IRS didn't consider your proposed swap of GLD for IAU a wash sale. I'm no expert on that, but to be safe you might consider just sitting on cash for the 30 days.
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Re: Tax Loss Harvesting Bad for PP?

Post by tomfoolery » Thu Sep 24, 2020 11:50 am

Hi Tyler,

Thanks for the reply.

It's my understanding that the collectibles tax rate only triggers if you have a net profit overall on your capital gains for that tax year.

For example, if you have $20k gains in GLD and $20k losses in long-term (> 1 year held) SPY, you have $0 net capital gains and thus no collectibles tax is triggered. In spite of the fact that your $20k losses in SPY would generally only offset other stock-based, non-collectible tax rate capital gains.

A more complex example:

Suppose you in the 12% tax bracket. In 2020 you realize 20k of gains in GLD. In 2021 you realize 20k of gains in TLT and 20k of losses in SPY. You will pay the collectibles tax rate of 28% in 2020 on your 20k of gains, in spite of being in the 12% tax bracket. And in 2021 you pay nothing because your losses and gains netted to zero.

Instead, suppose you could shift the sales such that your 2020 year GLD gains of $20k are negated by $20k of SPY losses in 2020, and you realized $20k of TLT gains in 2021. In total, you have the same capital gain of $20k across both years, but you alter the SPY losses to be in the same year as your GLD gains. You will get a tax break since your TLT gains will be taxed at the long-term capital gain rate in 2021. To be super technical, you will make out ahead significantly unless your WACC is very high since you'd be paying less than half the tax on the long-term TLT holdings than you'd be paying on the GLD collectible holdings, even though they are spaced out by one year.

In other words, all else equal, if you can tax loss harvest a non-GLD holding, then do so in a year when you have a gain in gold and can tax loss gain in gold. The concept of tax loss gain is uncommon, but it would simply be selling GLD and immediately rebuying it. No wash sales apply if there's a gain to be had. In other words, if you are going to tax loss harvest $20k in SPY in any given year, then you should tax loss gain your GLD if possible that year as well. Otherwise you risk a future when you are paying the full collectibles tax rate on GLD and can only deduct $3k of carry forward from a previous year's SPY tax loss harvest event.

That is an example of TLH is different for GLD. Now on to my more immediate scenario.

I took a $100k 401k loan for a home purchase from my self employed retirement account. I thus sold my GLD that was held in the 401k for cash, took the loan, and rebought GLD in taxable. This helped me maintain my PP. To be more technical, I don't use GLD, I use SGOL but for ease of understanding, I refer to GLD. Also, when I sold my GLD in the 401k, I immediately bought more GLD on margin in my taxable account since the loan would take a week to process and I wanted to remain market neutral. Side points.

Since I did this, GLD has taken a crap and I have some GLD losses in taxable. I was excited to do some tax loss harvesting when I realized I'd be screwing myself over. Since I will possibly not buy the house until 2021 and I already have $10k of losses in my taxable account this year due to my variable portfolio doing poorly. So if I harvest $10k of GLD losses now in 2020, I'll have a $20k loss for this calendar year, which only $3k is allowed to count against my self employment income, and the other $17k is carried forward to be used in $3k a year chunks.

Suppose GLD shoots up in 2021 before I buy a house. I then might have a $30k gain in my taxable GLD of which I'm paying 28% collectibles tax on. And of which I can only offset $3k from my prior year losses against. So I'm paying 28% of the $27k gain.

If instead, I ignore the $10k of GLD losses I have now, do not tax loss harvest and wait until 2021, if the same $30k gain occurs between now and then, I will only have a $20k taxable gain, since I never sold my GLD at a loss in 2020, and never did the tax loss harvest. Thus, I'd be paying significantly less collectible gains tax in 2021.

What my thesis is arriving at, is that it seems one should never, except with specific consideration, perform a TLH event on taxable gold holdings in the PP. The consideration might be that you're at the ACA cliff and need an extra $3k of capital losses to offset your W2 or 1099 income. Or that you never intend to sell the gold after you TLH because you plan to die before then and the cost basis of your taxable holdings will reset upon death anyway.

Further, it seems that in any year when you are TLH your SPY or TLT holdings, you should almost always perform a tax gain harvest against GLD holdings in that calendar year, rather than allow a >$3k capital loss carryover to occur, because if you wind up selling GLD at a gain in the year following a SPY or TLT tax loss harvest, you will wind up paying more in taxes that way.

Please critique this.
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Re: Tax Loss Harvesting Bad for PP?

Post by Tyler » Thu Sep 24, 2020 12:45 pm

tomfoolery wrote:
Thu Sep 24, 2020 11:50 am
Suppose you in the 12% tax bracket. In 2020 you realize 20k of gains in GLD. In 2021 you realize 20k of gains in TLT and 20k of losses in SPY. You will pay the collectibles tax rate of 28% in 2020 on your 20k of gains, in spite of being in the 12% tax bracket.
The last sentence is incorrect. Collectibles taxes are the lesser of your nominal tax rate and 28%. So in this situation, your tax on the gold gains would be 12%. See here for more info. However, your overall point is true. Using capital losses to offset long-term stock or bond gains (that are not taxed) is less desirable than using them to offset gold gains (that are taxed).

tomfoolery wrote:
Thu Sep 24, 2020 11:50 am
Suppose GLD shoots up in 2021 before I buy a house. I then might have a $30k gain in my taxable GLD of which I'm paying 28% collectibles tax on. And of which I can only offset $3k from my prior year losses against. So I'm paying 28% of the $27k gain.
The 3k carryover limit only applies to offsetting income, not capital gains. If you have $20k in losses in 2020, $3k will be used to offset 2020 income and you can use all of the remaining $17k to offset capital gains in 2021. So if you're in the 12% tax bracket and have a $30k gain in gold next year, the most you'll pay in taxes is 12% of your net $13k gains (assuming they can't be further offset in other ways).

BTW, don't take my word for it. TurboTax is a great tool to game out tax plans for your own personal situation.
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Re: Tax Loss Harvesting Bad for PP?

Post by tomfoolery » Sun Sep 27, 2020 11:37 pm

Thanks for the clarifications! I really was misunderstanding how this worked by quite a bit.
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