Which is the better option; deduct stock loss from income or create cap gain to offset?

Question

Scenario:
1. I have a $6000 stock loss that I'm never going to recover. I'm ready to sell.
2. I have a mutual fund that has long-term gains. It will cost me 1% redemption fee to sell.

What is the better option and why?
1. Deduct the $6000 ($3000 at a time) from my income in successive tax years. I'm in 28% tax bracket. CA State Tax 9.25%. (I'm not smart enough to figure the math on this.)

2. Sell $33,000 of the mutual fund shares (this will generate $6000 long-term gain). Pay the redemption fee of $330. Use the $6000 gain to offset the loss. Reinvest the $6000 in another mutual fund.

Answer 1

Excellent question that is sure to get a wide variety of answers.

Personally, I'd take the loss and use the $3000 against other income. This will lower your AGI and your taxable income...both are usually good things. Lower your tax burden now. Use the windfall to purchase more of the mutual fund. If you are happy with the fund, why sell it?

The federal government taxes LTCG at 15%...CA taxes all gains the same. If you don't sell the mutual fund, you save 28% + 9% x $3000 or $1110 in taxes for two years straight. If you sell the mutual fund now, you will lose out on that windfall. If you sell the mutual fund 5 years from now, the extra tax burdon will be 15% + 9% x $3000 = $720 ... a net gain of $390. Not only that, but you will be able to make interest off the government's $720 for five years before having to pay it back AND you won't be out the 1% sales expense.

In general, it is best to offset short-term capital gains with losses, but try to not offset long-term capital gains. A better way to say this may be to say never use long-term gains to offset any capital loss. Take the loss, lower your income, and enjoy the tax break.

One big caveot is you never know what Congress will do with tax rates, especially capital gains. A shift to a Democratic congress may cause the LTCG rate to go back to 20%. Even at 20% this type of tax planning makes sense, but the benefit drops considerably.

Answer 2

Answers thus far seem very good. Also, don't forget to consider other items that are effected by the amount of income you have. For example, by using the $3K loss will you be able to take more of your deductions subject to 2% of your AGI, or medical expenses subject to 7 1/5 % of your AGI? Will lowering your income by the $3,000 minimize or prevent you from phasing out on exemptions or itemized deductions?

Answer 3

the first answer is an excellent one I emphasize if your mutual fund is doing good keep it, sell later when you have other circumstances like low tax bracket or me be other tax advantages or investing in a retirement plan