Avoiding Capital Gains Long Term
Yes, you could avoid capital gains tax altogether, however, capital gains are used in determining your tax bracket even though they are not taxed at that rate.  This would only work in situations where your total capital gains and ordinary income kept you in the 0% longterm capital gains bracket. You can't realize a million dollars in capital gains and have no tax burden due to lack of ordinary income. You can potentially save some money by realizing capital gains strategically. Giving up income in an attempt to save on taxes rarely makes sense. "It's correct.   Be sure of your personal opportunity cost and not that you're letting the tax tail wag the dog just to score ""tax free"".  Your upside is $3,700 (single) or $7,000 (married) in taxes saved until you're out of the 0% zone.  Is that worth not receiving an income? Even if your savings are such that you don't need to work for income for a fiscal year, how would this affect the rest of your career and lifetime total earning prospects?  Now, maybe: Otherwise, I'd hope you have solid contacts in your network who won't be fazed by a resume gap and be delighted to have a position open for you in 2019 (and won't give you the ""mother returning to the workforce"" treatment in salary negotiations)."
My understanding is that losses are first deductible against any capital gains you may have, then against your regular income (up to $3,000 per year).  If you still have a loss after that, the loss may be carried over to offset capital gains or income in subsequent years As you suspect, a short term capital loss is deductible against short term capital gains and long term losses are deductible against long term gains.  So taking the loss now MIGHT be beneficial from a tax perspective.  I say MIGHT because there are a couple scenarios in which it either may not matter, or actually be detrimental: If you don't have any short term capital gains this year, but you have long term capital gains, you would have to use the short term loss to offset the long term gain before you could apply it to ordinary income.  So in that situation you lose out on the difference between the long term tax rate (15%) and your ordinary income rate (potentially higher). If you keep the stock, and sell it for a long term loss next year, but you only have short-term capital gains or no capital gains next year, then you may use the long term loss to offset your short-term gains (first) or your ordinary income.   Clear as mud? The whole mess is outlined in IRS Publication 550 Finally, if you still think the stock is good, but just want to take the tax loss, you can sell the stock now (to realize the loss) then re-buy it in 30 days.  This is called Tax Loss Harvesting.  The 30 day delay is an IRS requirement for being allowed to realize the loss. Right now, the unrealized appreciation of Vanguard Tax-Managed   Small-Cap Fund Admiral Shares is 28.4% of NAV. As long as the fund   delivers decent returns over the long term, is there anything stopping   this amount from ballooning to, say, 90% fifty years hence? I'd have a heck of a time imagining how this grows to that high a number realistically.  The inflows and outflows of the fund are a bigger question along with what kinds of changes are there to capital gains that may make the fund try to hold onto the stocks longer and minimize the tax burden. If this happens, won't new investors be scared away by the prospect of   owing taxes on these gains? For example, a financial crisis or a   superior new investment technology could lead investors to dump their   shares of tax-managed index funds, triggering enormous capital-gains   distributions. And if new investors are scared away, won't the fund be   forced to sell its assets to cover redemptions (even if there is no   disruptive event), leading to larger capital-gains distributions than   in the past? Possibly but you have more than a few assumptions in this to my mind that I wonder how well are you estimating the probability of this happening. Finally, do ETFs avoid this problem (assuming it is a problem)? Yes, ETFs have creation and redemption units that allow for in-kind transactions and thus there isn't a selling of the stock.  However, if one wants to pull out various unlikely scenarios then there is the potential of the market being shut down for an extended period of time that would prevent one from selling shares of the ETF that may or may not be as applicable as open-end fund shares. I would however suggest researching if there are hybrid funds that mix open-end fund shares with ETF shares which could be an alternative here. Selling one fund and buying another will incur capital gains tax on the sale for the amount of the gain. I'm not aware of any sort of exemption available due to you moving out of the country. However, long-term capital gains for low-tax-bracket taxpayers is 0%. As long as your total income including the gains fits within the 15% regular tax bracket, you don't pay any long-term capital gains. Options for you that I see to avoid taxes are: Note that even if you do sell it all, it's only the amount of gains that would take your income over the 15% normal tax bracket that would be taxed at the long-term rate of 15%, which may not end up being that much of a tax hit. It may be worth calculating just how bad it would be based on your actual income. Also note that all I'm saying here is for US federal income taxes. The state you most recently lived in may still charge taxes if you're still considered a resident there in some fashion, and I don't know if your new home's government may try to take a cut as well. In the US, it is perfectly legal to execute what you've described. However, since you seem to be bullish on the stock, why sell? How do you KNOW the price will continue downwards? Aside from the philosophical reasoning, there can be significant downside to selling shares when you're expecting to repurchase them in the near future, i.e. you will lose your cost basis date which determines whether or not your trade is short-term (less than 1 year) or long-term. This cost basis term will begin anew once you repurchase the shares. IF you are trying to tax harvest and match against some short-term gains, tax loss harvesting prior to long-term treatment may be suitable. Otherwise, reexamine your reasoning and reconsider the sale at all, since you are bullish. Remember: if you could pick where stock prices are headed in the short term with any degree of certainty you are literally one of a kind on this planet ;-).  In addition, do remember that in a tax deferred account (e.g. IRA) the term of your trade is typically meaningless but your philosophical reasoning for selling should still be examined. "A lot of people have already explained that your assumptions are the issue, but I'll throw in my 2¢. There are a lot of people who do the opposite of long term investing.  It's called high frequency trading.  I'd recommend reading the Wikipedia article for more info, but very basically, high frequency traders use programs to determine which stocks to buy and which ones to sell. An example program might be ""buy if the stock is increasing and sell if I've held it more than 1 second.""" "As Dilip said, if you want actual concrete, based in tax law, answers, please add the country (and if applicable, state) where you pay income tax. Also, knowing what tax bracket you're in would help as well, although I certainly understand if you're not comfortable sharing that. So, assuming the US... If you're in the 10% or 15% tax bracket, then you're already not paying any federal tax on the $3k long term gain, so purposely taking losses is pointless, and given that there's probably a cost to taking the loss (commission, SEC fee), you'd be losing money by doing so. Also, you won't be able to buy back the loser for 31 days without having the loss postponed due to the wash sale that would result. State tax is another matter, but (going by the table in this article), even using the highest low end tax rate (Tennessee at 6%), the $50 loss would only save you $3, which is probably less than the commission to sell the loser, so again you'd be losing money. And if you're in a state with no state income tax, then the loss wouldn't save you anything on taxes at the state level, but of course you'll still be paying to be able to take the loss. On the high end, you'd be saving 20% federal tax and 13.3% state tax (using the highest high end tax state, California, and ignoring (because I don't know :-) ) whether they tax long-term capital gains at the same rate as regular income or not), you'd be saving $50 * (20% + 13.3%) = $50 * 33.3% = $16.65. So for taxes, you're looking at saving between nothing and $16.65. And then you have to subtract from that the cost to achieve the loss, so even on the high end (which means (assuming a single filer)) you're making >$1 million), you're only saving about $10, and you're probably actually losing money. So I personally don't think taking a $50 loss to try to decrease taxes makes sense. However, if you really meant $500 or $5000, then it might (although if you're in the 10-15% brackets in a no income tax state, even then it wouldn't). So the answer to your final question is, ""It depends."" The only way to say for sure is, based on the country and state you're in, calculate what it will save you (if anything). As a general rule, you want to avoid letting the tax tail wag the dog. That is, your financial goal should be to end up with the most money, not to pay the least taxes. So while looking at the tax consequences of a transaction is a good idea, don't look at just the tax consequences, look at the consequences for your overall net worth." Your question reminds me of a Will Rogers quote: buy some good stock, and hold it till it goes up, then sell it. If it don’t go up, don’t buy it. There's no way to prevent yourself from buying a stock that goes down.  In fact all stocks go down at some times.  The way to protect your long term investment is to diversify, which increases the chances that you have more stocks that go up than go down.  So many advisors will encourage index funds, which have a low cost (which eats away at returns) and low rick (because of diversification).  If you want to experiment with your criteria that's great, and I wish you luck, but  Note that historically, very few managed funds (meaning funds that actively buy and sell stocks based on some set of criteria) outperform the market over long periods.  So don't be afraid of some of your stocks losing - if you diversify enough, then statistically you should have more winners than losers. It's like playing blackjack.  The goal is not to win every hand. The goal is to have more winning hands than losing hands. "When a question is phrased this way, i.e. ""for tax purposes"" I'm compelled to advise - Don't let the tax tail wag the investing dog.  In theory, one can create a loss, up to the $3K, and take it against ordinary income. When sold, the gains may be long term and be at a lower rate. In reality, if you are out of the stock for the required 30 days, it will shoot up in price. If you double up, as LittleAdv correctly offers, it will drop over the 30 days and negate any benefit. The investing dog's water bowl is half full." Here's how capital gains are totaled: Long and Short Term. Capital gains and losses are either long-term or   short-term. It depends on how long the taxpayer holds the property. If   the taxpayer holds it for one year or less, the gain or loss is   short-term. Net Capital Gain.  If a taxpayer’s long-term gains are more than their   long-term losses, the difference between the two is a net long-term   capital gain. If the net long-term capital gain is more than the net   short-term capital loss, the taxpayer has a net capital gain. So your net long-term gains (from all investments, through all brokers) are offset by any net short-term loss.  Short term gains are taxed separately at a higher rate. I'm trying to avoid realizing a long term capital gain, but at the same time trade the stock. If you close in the next year, one of two things will happen - either the stock will go down, and you'll have short-term gains on the short, or the stock will go up, and you'll have short-term losses on the short that will offset the gains on the stock.  So I don;t see how it reduces your tax liability.  At best it defers it. Assuming that what you want to do is to counter the capital gains tax on the short term and long term gains, and that doing so will avoid any underpayment penalties, it is relatively simple to do so. Figure out the tax on the capital gains by determining your tax bracket. Lets say 25% short term and 15% long term or (0.25x7K) + (0.15*8K) or $2950.  If you donate to charities an additional amount of items or money to cover that tax. So taking the numbers in step 1 divide by the marginal tax rate $2950/0.25 or $11,800.  Money is easier to donate because you will be contributing enough value that the IRS may ask for proof of the value, and that proof needs to be gathered either before the donation is given or at the time the donation is given. Also don't wait until December 31st, if you miss the deadline and the donation is counted for next year, the purpose will have been missed. Now if the goal is just to avoid the underpayment penalty, you have two other options.  The safe harbor is the easiest of the two to determine. Look at last years tax form. Look for the amount of tax you paid last year. Not what was withheld, but what you actually paid. If all your withholding this year, is greater than 110% of the total tax from last year, you have reached the safe harbor. There are a few more twists depending on AGI Special rules for farmers, fishermen, and higher income taxpayers.   If at least two-thirds of your gross income for tax year 2014 or 2015   is from farming or fishing, substitute 662/3% for 90% in (2a) under   the General rule, earlier. If your AGI for 2014 was more than $150,000   ($75,000 if your filing status for 2015 is married filing a separate   return), substitute 110% for 100% in (2b) under General rule ,   earlier. See Figure 4-A and Publication 505, chapter 2 for more   information. Do not use a stop loss order as a long-term investor.  The arguments in favor of stop losses being presented by a few users here rely on a faulty premise, namely, that there is some kind of formula that will let you set your stop such that it won't trigger on day-to-day fluctuations but will trigger in time to protect you from a significant loss in a serious market downturn.  No such formula exists.  No matter where you set your stop, it is as likely to dump you from your investment just before it begins climbing again as it is to shield you from continued losses.  Each time that happens, you will have sold low and bought high, incurring trading fees into the bargain.  It is very unlikely that the losses you avoid in a bear market (remember, you still incur the loss up until your stop is hit; it's only the losses after that that you avoid) will make up the costs of false alarms. On top of that, once you have stopped out of your first investment choice, then what?  Will you reinvest in some other stock or fund?  If those investments didn't look good to you when you first set up your asset allocation, then why should they look any better now, just because your primary investment has dropped by some arbitrary[*] amount?  Will you park the money in cash while you wait for prices to bottom out?  The market bottom is only apparent in retrospect.  There is no formula for calling it in real time. Perhaps stop loss orders have their uses in active trading strategies, or maybe they're just chrome that trading platforms use to attract customers.  Either way, using them on long-term investments will just cost you money in the long run.  Forget the fancy order types, and manage your risk through your asset allocation.  The overwhelming likelihood is that you will get better performance, and you will spend less time worrying about your investments to boot. [*] Why are the stop levels recommended by the formulae invariably multiples of 5%?  Do the market gods have a thing for round numbers? "You should check with your broker for details, but you can generally specify which ""lot"" you are selling.  where I've seen it, that's done by concurrently sending a ""letter of instruction"" documenting your choice of lot concurrent with the sale, but different brokers may handle this differently.  I would think this should work for the case that you describe. (In addition, the default rule used by your broker is ""probably"" first-in-first-out, which will do what you want here.) Note that this may come into play even in a margin account to the extent that you might want to specify a lot in order to obtain (or set yourself up for later benefit of) favorable tax treatment under the long-term capital gains rules" Equal sized gains and losses in alternating years would lead to an   unjust positive tax. On the contrary. If I can take my gains at the long term rate (15%) in even years, but take losses in odd years, up to $3000, or let them offset short term gains at ordinary rate, I've just gamed the system.  What is the purpose of the wash sale rule? Respectfully, we here can do a fine job of explaining how a bit of tax code works. And we can suggest the implication of those code bits. But, I suspect that it's not easy to explain the history of particular rules. For wash sale, the simple intent is to not let someone take a loss without actually selling the stock for a time. You'd be right to say the +/- 30 days is arbitrary.  I'd ask you to keep 2 things in mind if you continue to frequent this board - You also may want to consider how this interacts with the stepped up basis of estates.  If you never sell the stock and it passes to your heirs with your estate, under current tax law the basis will increase from the purchase price to the market price at the time of transfer.   In a comment, you proposed:   Thinking more deeply though, I am a little skeptical that it's a free lunch: Say I buy stock A (a computer manufacturer) at $100 which I intend to hold long term. It ends up falling to $80 and the robo-advisor sells it for tax loss harvesting, buying stock B (a similar computer manufacturer) as a replacement. So I benefit from realizing those losses. HOWEVER, say both stocks then rise by 50% over 3 years. At this point, selling B gives me more capital gains tax than if I had held A through the losses, since A's rise from 80 back to 100 would have been free for me since I purchased at 100. And then later thought  Although thinking even more (sorry, thinking out loud here), I guess I still come out ahead on taxes since I was able to deduct the $20 loss on A against ordinary income, and while I pay extra capital gains on B, that's a lower tax rate. So the free lunch is $20*[number of shares]*([my tax bracket] - [capital gains rates]) That's true.  And in addition to that, if you never sell B, which continues to rise to $200 (was last at $120 after a 50% increase from $80), the basis steps up to $200 on transfer to your heirs.   Of course, your estate may have to pay a 40% tax on the $200 before transferring the shares to your heirs.  So this isn't exactly a free lunch either.  But you have to pay that 40% tax regardless of the form in which the money is held.  Cash, real estate, stocks, whatever.  Whether you have a large or small capital gain on the stock is irrelevant to the estate tax.   This type of planning may not matter to you personally, but it is another aspect of what wealth management can impact. Tax questions require that you specify a jurisdiction.  Assuming that this is the US, you owe Federal income tax (at the special long-term capital gains tax rate) on the net long-term capital gains (total long-term capital gains minus total long-term capital losses) and so, yes, if these two were your only transactions involving long-term holdings, you would pay long-term capital gains tax on $3000-$50 = $2950.  Many States in the US don't tax long-term capital gains at special rates the way the Federal Government does, but you still pay taxes on the net long-term capital gains. I suspect that other countries have similar rules.