Kelly Bullis
Is there a benefit to keeping a large capital loss carryover or using a simple trick to convert it to increased basis in stocks you hold for future sale?
Let’s say you have a decent-sized nest egg for your last years of life and back in 2022 you panicked a little at the rapid drop in the stock market and sold a lot of your stocks, accumulating a $400,000 capital loss.
The general rule is that you can only deduct that against realized capital gains or be limited to a maximum deduction of $3,000 of that loss each year. Ouch!
Even worse, at your death, the remaining loss just disappears (if you are unmarried). If married, your spouse gets to keep half of the remaining loss for future use and only half disappears.
So here is an idea to consider. Let’s say you own $2 million in stocks with a basis of $1 million. Step 1: Sell enough stock to generate a $400,000 gain. (Let’s say that is $800,000 in our example.) Using up the $400,000 capital loss to avoid paying any taxes. Step 2: Turnaround the next day and buy back all the stock you sold (NOTE: Wash sale rule does not apply to gains, so the immediate buyback causes no tax problems).
This works best when the stock market isn’t in wild gyrations and is fairly stable.
What you have after the above is $2 million value in your stock portfolio (nothing really changed there). Your stock portfolio basis is now increased by the capital loss you used up, so in our example it went from $1 million to $1.4 million. (That eliminates up to $400,000 from being taxed in the future!)
In essence, you have traded the current capital loss for an increased basis in your stock portfolio without having any current tax consequences.
But wait! There’s a catch. (Isn’t there always?) What if you don’t live very much longer?
If you die soon after doing all this, your heirs get a full step-up in basis of the stock portfolio to $2 million (if you live in a community property state like Nevada). Thus, wiping out the remaining gain in your stock portfolio, leaving no benefit for all the hard work you just did to use your large capital loss to increase your stock portfolio carrying basis.
So to answer the question at the beginning of this column… If you are not in good health and do not expect to live much longer, then it doesn’t matter if you have a large capital loss or not when you die because your heirs will receive the full value of your stock portfolio without paying any capital gains tax anyway. If you are healthy and expect to use that stock portfolio to supplement your lifestyle for many years to come, then converting your capital loss to increased basis and saving tax when you sell stocks in the future is a good idea.
Have you heard? Psalm 20:4 says, “May he grant you your heart’s desire and fulfill all your plans.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.