Tax Idea in a down market for taxable investment accounts

If you hold investments in taxable brokerage accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The federal income tax rate on long-term capital gains recognized in 2019 is only 15% for most taxpayers. However, the maximum rate of 20% plus the 3.8% net investment income tax (NIIT) can apply at higher income levels.

To the extent you have capital losses that were recognized earlier this year or capital loss carryovers from pre-2019 years, selling appreciated shares this year won’t result in any tax hit. In particular, sheltering net short-term capital gains with capital losses is a smart tax move, because net short-term gains would otherwise be taxed at higher ordinary-income rates.

What should you do with losing investments that you’d like to unload? Consider selling them and using the resulting capital losses to shelter capital gains, including high-taxed short-term gains, from other sales this year.

If your capital losses exceed your capital gains, the result would be a net capital loss for the year. A net capital loss can also be used to shelter up to $3,000 of 2019 ordinary income (or up to $1,500 if you use married-filing-separately status). Ordinary income includes such items as salaries, bonuses, self-employment income, interest income and royalties. Any excess net capital loss from 2019 can be carried forward to 2020 and beyond.

Having a capital loss carryover can give you extra investing flexibility in future years, because you don’t have to hold appreciated securities for over a year to get a preferential tax rate. The top federal rates on net short-term capital gains recognized in 2020 through 2025 are 35% and 37% (plus the 3.8% NIIT if applicable). So, it’s beneficial to have a capital loss carryover to shelter short-term gains recognized next year and beyond.