Harvest Tax Losses 2012 or 2013

 

Does it make sense to harvest losses in the last two months of 2012, or does it make sense to wait until 2013?

 

This decision seems simple on the surface. The tax benefit of a realized loss depends upon the current tax rate. The benefit is maximized by realizing the loss in 2013 (presuming capital gains rates are higher in 2013). There are a few key considerations:

1. Will losses harvested in 2012 be carried forward?

 

If your current tax position is such that you expects to have capital loss carryforwards at the end of 2012, then it makes sense to harvest the loss in 2012.  All losses realized in 2012 will be carried forward to 2013 and beyond. There is no guarantee that a loss in 2012 will still be in place in early 2013, so it makes sense to realize it in 2012 before it disappears.  The bottom line here is that if you can answer “yes” to the first question for your return, then it makes sense to harvest the loss in 2012. Please note that although 2012 capital losses may be carried forward to reduce future capital gains at the 20 percent income tax rate, these losses may not be available to offset the future 3.8 percent health care surtax. This matter should be settled when the health care surtax regulations are released.

2. Did you realize short-term gains in 2012?

 

The capital gains tax on short-term gains is so costly that, in general, if you have unsheltered short-term gains this year, it makes sense to offset them by realizing losses in 2012. This is especially true if you are able to offset short-term gains with long-term losses.  If the answer to the second question is “yes,” then it makes sense to harvest the loss in 2012.

3. Do you have 2012 capital gains year to date?

 

If you have taxable capital gains year to date, any long-term capital loss opportunities should be delayed into 2013 so you will pay the 15 percent rate on the 2012 realized gains and lock in both the 2013 capital loss against a 20 percent rate and the 2013 health care surtax of 3.8 percent.

If the answer to the first two questions is “no” or the answer to the third question is “yes,” then it could make sense to delay harvesting losses into 2013.

 

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