Key Takeaways
- A Retire Sooner listener holds three Vanguard bond funds with losses of 6% to 12% since 2022 and asked whether he should sell them.
- If he holds $200,000 of these funds in a taxable account and sells them at a 10% loss, he realizes a $20,000 capital loss. That loss first cancels any capital gains in full.
- With no gains to offset, he can deduct $3,000 a year from his other income and carry the rest forward. At the 22% bracket, that cuts his taxes by $660 a year.
- If he buys the same fund or a substantially identical one within 30 days before or after the sale, he can’t deduct the loss. So the money has to go into a different fund.
If you’ve owned bond funds since before 2022, there’s a fair chance your statement still shows a loss. On Nov. 10, the 10-year Treasury yield briefly went back above 5%, so higher rates are still weighing on the bonds those funds hold. That stings, but in a taxable account, a loss like that can pay you back at tax time.
Three funds in the doldrums
One listener to Retire Sooner with Wes Moss wrote in with a simple question: should he ditch his bond funds? Wes Moss read the note out on the show’s Nov. 5 episode: “I’ve been a longtime holder of three Vanguard bond funds. They’ve all been in the doldrums since 2022. So I’ve got unrealized losses of six to 12%.”
He wanted to know whether he’d be better off exchanging out of them into something else. The funds make up less than 10% of his portfolio, and he has other cash in money market funds, CDs and I-Bonds.
Wes Moss made a fair point in his answer: “you may have an unrealized loss, but you’ve probably made some money if you were to count all the interest you’ve gotten over those years.” True enough. But once he sells, the drop in the funds’ price becomes a capital loss, and he can put that loss to work.
He didn’t say how much he has in the funds. So let’s say it’s $200,000, held in a taxable brokerage account and down 10% overall. Selling them for $180,000 would realize a $20,000 loss.
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Only $3,000 a year comes off other income
Capital losses first offset capital gains, with no limit. So if he has sold other investments at a profit this year, the $20,000 loss can cancel up to $20,000 of those gains.
Any loss left after that comes off his other income, up to $3,000 a year ($1,500 if he’s married filing separately). Anything over that limit carries over to the next year, and the year after that, until it’s all used up.
For a retiree, the carryover also has an end date. A loss still unused when the taxpayer dies can be deducted only on the final return, within the same yearly limit, and the estate can’t carry it over.
Seven years of tax savings
Say he has no gains to offset this year and he’s in the 22% bracket. The $20,000 loss takes $3,000 off his taxable income this year, which cuts his tax bill by $660. The other $17,000 carries forward.
At that pace, six years of $3,000 deductions use up $18,000, and a seventh year takes the last $2,000, which is worth $440. That’s $4,400 less tax over seven years ($660 a year for six years, then $440), if he stays in the 22% bracket the whole time.
He can use up the loss faster in a year with gains. A carried-over loss is treated as if it happened in the new year. So in any year he sells something at a profit, the loss cancels that gain in full, and only then does the $3,000 limit apply to what’s left. Not bad for a few funds he was ready to ditch.
The new fund has to be a different fund
He asked about exchanging into something else, and under the wash-sale rule, it has to be something else. If he buys the same fund or a substantially identical one within 30 days before or after the sale, he can’t deduct the loss. Instead, the disallowed loss is added to the cost of the new shares, which pushes the deduction back until he sells them. It’s also a wash sale if his spouse buys substantially identical shares.
He has a deadline, too. A sale made before the year is out counts on this year’s return. If he waits until January, the whole seven-year schedule starts a year later.
And all of this assumes a taxable account. A sale inside an IRA or a 401(k) doesn’t produce a loss he can deduct.
Take the loss, keep the bonds
If those funds sit in a taxable account, I’d sell them before Dec. 31 and move the money into a bond fund that isn’t substantially identical to the old ones. He keeps about the same slice of his portfolio in bonds, and his tax bill shrinks for years to come. Of course, if rates fall and bond prices recover before he sells, the loss shrinks, and the tax break shrinks with it. I suspect that’s a problem he’d be happy to have.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
