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.