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This year I have a net Long-term Capital Gain of $6483 for which I would owe $1296.60 in taxes (20%). I am planning on selling a stock which would give me a net Short-term Capital Loss of $861.

My question is this:

Would I then use the $861 dollar for dollar to offset the $6483 gain - thus reducing my Long-term Capital Gain to $5622 upon which I would owe $1124.4 in taxes (20%)?

or...

Is the $861 used to offset the $1296.60 in taxes that I owe on the $6483 Long-term Capital Gain - thus reducing my tax bill to $435.60?

I assume that the first scenario is what I have to do... but it seems like I'm "wasting" the short-term loss by offsetting the long-term gain which is only taxed at 20% Perhaps I would be better off cashing in some stocks I own that have had big short-term runups... so I could use the short-term loss to offset the short-term gains which are taxed as ordinary income.

Sorry for the naive question, but this is my first year where I've had to pay any capital gains taxes. I think they should do away with them entirely!
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