Optimal capital gain/loss strategy?

Financial Planning Tax Strategies
1

I recently sold a business in the 7-figures range and will pay capital
gains taxes in 2022.

I also have a short-term stock X position with an unrealized $25K loss
and a long-term position in stock Y with substantial unrealized gains.

I don’t really want to sell my position in X, however I figured since I
have plenty of cash, I could purchase a new position in X and then sell
my old position at a short-term loss of $25K.

My question is whether if makes any sense to ‘create’ a short-term loss
in 2022. Can I apply this loss to 2022 either against the sale of my
business or by selling enough of my long-term Y position gains to
offset the loss?

Obviously this will be handled by a tax professional, but I’m asking
in preparation before consulting with them. Thanks.

-Rubic

2

I recently sold a business in the 7-figures range and will pay capital
gains taxes in 2022.

I also have a short-term stock X position with an unrealized $25K loss
and a long-term position in stock Y with substantial unrealized gains.

I don’t really want to sell my position in X, however I figured since I
have plenty of cash, I could purchase a new position in X and then sell
my old position at a short-term loss of $25K.

My question is whether if makes any sense to ‘create’ a short-term loss
in 2022. Can I apply this loss to 2022 either against the sale of my
business or by selling enough of my long-term Y position gains to
offset the loss?

Capital gains are capital gains. Gains/losses from the sale of your business and sales of stocks all add up on your Schedule D, and in the end, short term losses are allowed to offset long term gains, and vice versa. So a short term loss of $25k in X would offset $25k of your total long term gains, be they from the business or from the sale of Y. I will point out that if you’re already going to be paying capital gains at the 23.8% Federal rate* on the business (which seems likely, unless your basis in the business is also at least 7 figures), creating an additional capital gain by selling Y seems like it would be counterproductive, unless you believe a significant portion of the gain in Y will disappear before you sell in a future year, or you believe you will also be paying capital gains taxes at the 23.8% rate in those future years.

That said - your plan to purchase a new position in X and then sell your current position in X will create a wash sale, unless there is at least 30 days between the sale and the purchase transactions of the two different lots. If you create a wash sale, the short term loss would become part of the basis in your new position in X, and could not be claimed on your tax return until you actually sell that lot of X (unless, of course, in doing the sale, you create another wash sale by buying another position in X within 30 days before or after another loss sale).

Obviously this will be handled by a tax professional, but I’m asking
in preparation before consulting with them.

You need to consult the tax professional before you do any transactions in X to attempt to create a loss and/or keep your ownership in X, and before you sell any Y. I hope you consulted the tax professional prior to selling the business. They might have been able to propose strategies on selling that would have resulted in less taxes owed.

AJ

*The 23.8% rate consists of the capital gains rate of 20% that applies to MFJ filers over $500k, MFS filers over $250k and all other filers over $400k; plus the 3.8% NIIT surcharge that applies to MFJ filers over $250k, MFS filers over $125k and all other filers over $200k.

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3

<< Capital gains are capital gains. Gains/losses from the sale of your business and
sales of stocks all add up on your Schedule D >>

Great. That answers my main question.

<< your plan to purchase a new position in X and then sell your current position in X will
create a wash sale >>

I neglected to mention that I intend to wait 30 days between the purchase/sale transactions,
but thanks for the reminder.

<< I hope you consulted the tax professional prior to selling the business. >>

Yes, they were involved from the very beginning during the due diligence process.

Thanks for your comments.

-Rubic

4

I’d like to Highlight a couple points AJ makes, as I think these often get lost in the verbiage

Capital gains are capital gains. Gains/losses from the sale of your business and sales of stocks all add up on your Schedule D, and in the end, short term losses are allowed to offset long term gains, and vice versa.

purchase a new position in X and then sell your current position in X will create a wash sale,
Make sure there is at least a 33-day window between the "buy date " and “loss sale date”, whether the buy is before or after the sell.
The official period is, IIRC, 30 days. I use 33 days, due to “transaction settle date” etc.

If you create a wash sale, the short term loss would become part of the basis in your new position in X, and could not be claimed on your tax return until you actually sell that lot of X

The seller does not LOSE the “loss”, the accounting is merely different.

Yes, there are nuances. My comments are simply to drag the concept out of the verbiage.
Each taxpayer’s situation is unique, and consulting a tax professional is useful.

:alien:
ralph

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5

Capital gains are capital gains. Gains/losses from the sale of your business and sales of stocks all add up on your Schedule D, …

That’s not entirely true. Some portion of the gain could be characterized as the sale of business property (Form 4797) which would bypass Schedule D and be reported on Schedule 1, line 4.

You stated that you used a tax professional throughout the sale process. She should be able to tell you exactly how your sale will be reported on your tax return.

Ira

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6

I can’t address the overall strategy as it pertains to your schedule D. I just want to comment on selling a stock you like and expect a net positive return in long run.

If you sell the stock at a loss today, you can claim it as such as others have said. I agree. However, when you buy it back (let’s assume there’s no wash involved), what you’ve really done is adjust your basis price lower on the stock. Should the stock recover as you hope, you now have a larger capital gain to claim than if you had simply just rode it out.

Selling to take a loss and then buying it back lower almost seems like a variation on the Broken Window Fallacy. We don’t see the future tax consequences of the decision.

I’m not a tax advisor. I’m just adding my two cents worth ( which is currently valued at 1/2 cent due to Fed currency devaluation.)

7

The answers so far have only served to confuse the OP and do not answer his question directly.

If you sell the shares that are showing a profit, you do not have to worry about a wash sale. You can sell and buy back immediately if that’s what you want.

Ira

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