Q.: Dear Dan, We have roughly $45,000 in short-term & long-term losses this year from our brokerage accounts. Is the best move to sell some of our positive stock positions in our brokerage accounts to offset these losses? We are doing a Roth conversion and need to raise capital to pay taxes anyway, so we think that is the best move. Is that the right strategy?
A.: You are smart to think about this. Those losses have value and just selling because there are losses that would offset gains may not be wise. I’ve seen many people make tax-motivated decisions that were suboptimal choices for their portfolios or financial planning strategies
You said you will need to raise some cash to pay the taxes from a conversion. That’s a decent reason to sell some of your holdings. Paying the taxes from the brokerage account rather than through withholding from the conversion is typically better because it maximizes the amount that resides in the Roth account.
Another decent reason to sell is if you have a holding that you no longer want. This could be a good time to do that.
Regardless, you might not want to sell so much as to offset all the loss because $3,000 of the loss can offset ordinary income. At all levels of income, the tax rate applied to ordinary income is higher than that for capital gains. This difference motivates many people to take losses but not gains.
If your taxable income is below $83,350 for 2022 ($41,675 for single filers), you should think about selling only what you need for the taxes and only if that’s the only way to get the cash to pay the tax. To the extent your taxable income is below $83,350, long-term gains are not taxable at all, so incurring gains wastes the loss.
Roth conversions generate ordinary income. By not offsetting all the losses with gains, you can convert up to $3,000 more without additional tax. If you plan to do more conversions, only selling what you need for taxes might allow for another $3,000 next year or future years by carrying forward the unused loss.
Your loss probably will not carry for 15 years ($45,000/$3,000) but it could help a bit in some of those years. The higher your tax bracket, the more valuable the loss becomes regardless of how you use it.
There are plenty of other twists and turns this can take so I encourage you to discuss the short and long term consequences of any transaction with your tax adviser.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your Certified Financial Planner professional about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.