Tax loss harvesting details

[jdilla1107]

I am new to the idea of tax loss harvesting, but I love the idea and want to take some losses in 2013. I have some VTI in taxable that is down about 3%. In absolute dollars, this loss is about $6,000. In general, my goal is to never sell until retirement.

Let's say, I sell the VTI and buy SPY. Now, let's say after 30 days the market goes up 5%. Now I have gain in SPY and am somewhat "stuck" holding SPY even though I don't really want to own SPY. I will have to hold SPY until the market goes down again or possibly for many years. This seems less than ideal. Am I missing something?

For people that TLH, do you end up with a collection of "second choice" funds?

Thanks.

[jebmke]

no, you are correct, you want to make sure you harvest to a holding that you are comfortable holding, possibly "forever". There are many excellent funds that are "close enough." If swapping within VG, I moved from TSM to a 75/25 holding of 500 and extended market in 2008. Then in 2009 I moved back to TSM when the market moved down further. However, had it not moved down further, I was perfectly content to hold the 500/Extended market fund for the long haul.

Is there some reason you don't want to book the loss in 2012?

[sscritic]

Who knows what second choice means. I used to have 500 Index and Extended Market. I sold both at losses. I bought Large Cap, so I didn't have any smaller cap. So I bought TSM. The combination of Large Cap and TSM means I am "over weighted" in larger stocks. I don't care; it's good enough for me. Certainly not second choice; maybe one point oneth choice.

[livesoft]

For people that TLH, do you end up with a collection of "second choice" funds?

Thanks.

Yes, one can end up with 2 different funds for the asset class: your first choice and your second choice.

[jdilla1107]

Thank you for the replies.

To jebmke,

I don't want to book it in 2012 because I have very large long term gains in 2012, so additional capital losses will only offset long term capital gains for this year. The gains came from business activity and not my portfolio. Basically my 2012 income is almost all long term gains. (very much like Mitt Romney and his very low tax rate)

In 2013, I will be back to a normal W2 employee, so I wanted to start the normal boglehead TLH process going forward.

[Default User BR]

You could go with VOO (S&P 500) and VXF (extended market) to closely replicate your original VTI holding, then not worry about it.


Brian

[jdilla1107]

VOO to VXF would be a dollar weight of 4 to 1, right?

[Cash]

The alternative, advocated by Taylor among others, is to stay in cash for 31 days then buy back the original, "first choice," security. Grabiner did an anlaysis a while back analyzing when one might prefer one approach over the other.

[jdilla1107]

Doesn't that seem risky when the numbers are a certain way? To harvest this particular loss is about 25% of my total stock allocation and is about $200,000. This loss also only represents about a 3% loss. It seems like it would stink if I sold and then the market went up 3%.

If the loss was a >20% loss and the absolute numbers were smaller, it would seem less risky.

I guess the argument is that it's essentially a 50/50 gamble with the most likely outcome being minimal change?

[Sidney]

with the breadth of low cost alternatives at VG and others there really is no need to sit out for 31 days.

[Cash]

Doesn't that seem risky when the numbers are a certain way? To harvest this particular loss is about 25% of my total stock allocation and is about $200,000. This loss also only represents about a 3% loss. It seems like it would stink if I sold and then the market went up 3%.

If the loss was a >20% loss and the absolute numbers were smaller, it would seem less risky.

I guess the argument is that it's essentially a 50/50 gamble with the most likely outcome being minimal change?

I think that is one argument in Taylor's list. Here is grabiner's analysis:

viewtopic.php?f=1&t=96324

[jdilla1107]

Ok, thanks. In my opinion, the key to that analysis is this: "keep the money in cash for simplicity unless the harvest would take you outside your rebalancing bands."

That is what I was awkwardly trying to say. In my particular case, I would be WAY out of my rebalancing range.

[stan1]

You might want to consider ITOT (iShares Total Market) or SCHB (Schwab US Broad Market) or VV (Vg Large Cap) instead of SPY as your next best 2nd choice to VTI because of expense ratios and market breadth, although you'd have to watch average daily trading volumes and make sure you understand how to place limit orders (especially if you don't have time to sit in front of the computer watching real time quotes all day long).

Personally, harvesting $6K wouldn't be worth the hassle on a $200K holding -- but I'm sure others will disagree.

Under no circumstances would I stay out of the market for 31 days. Once upon a time there weren't any good alternatives to the Vanguard Total Stock Market mutual fund; now there are several.

[bdpb]

Do you have a similar amount in bonds in a tax deferred account?

If so, sell VTI in taxable and buy bonds or cash. In tax deferred account, sell bonds and buy SPY. In 31 days, undo it all.

[jdilla1107]

Wouldnt a problem be if stocks dropped in that 31 day period? Then I would have a loss in tax deferred space that I could never use.

I think I'll go with the VOO and VXF switch in taxable.

[bdpb]

Wouldnt a problem be if stocks dropped in that 31 day period? Then I would have a loss in tax deferred space that I could never use.

I think I'll go with the VOO and VXF switch in taxable.

If stocks go down in 31 days and you TLH again, you wouldn't have a "second choice" problem. I thought the "second choice" problem was what you were trying to avoid. That will only exist of stocks go up. There is no perfect solution.

A minor warning about TLH VTI and replacing with VOO and VXF. You need to replace your VTI with something that is not "substantially identical". Although unlikely, it might be argued that some combination of VOO and VXF is substantially identical to VTI.

[grabiner]

The alternative, advocated by Taylor among others, is to stay in cash for 31 days then buy back the original, "first choice," security. Grabiner did an anlaysis a while back analyzing when one might prefer one approach over the other.

Rule of Thumb for when to TLH into cash

When harvesting a loss, keep the money in cash for simplicity unless the harvest would take you outside your rebalancing bands.

The key is that the cost of staying in cash for 31 days is trivial (and may be less than the commissions and spreads for an extra ETF trade) unless your harvest is so large that it significantly affects your portfolio.

[ploldo]

I hope I can ask two dumb TLH questions here.

How do I know if my TLH for this year "worked"? I have a loss in capital gains this year so I'm assuming thats partly because of TLHing.

The losses were over $3k. How do I know if these carry over yearly? Is this something Vanguard automatically keeps track of or should I be telling my CPA about this?

[sscritic]

I hope I can ask two dumb TLH questions here.

How do I know if my TLH for this year "worked"? I have a loss in capital gains this year so I'm assuming thats partly because of TLHing.

The losses were over $3k. How do I know if these carry over yearly? Is this something Vanguard automatically keeps track of or should I be telling my CPA about this?

You could try doing your own taxes so you could learn these things. You can also let your CPA handle it. Then check: did you get the same answer as your CPA?

I don't have a CPA, but if I did, I would do just that. You sign your tax return under penalty of perjury that they are correct.

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.

I guess total ignorance might be a defense if you are challenged, so maybe you shouldn't learn about taxes.

[dbr]

I hope I can ask two dumb TLH questions here.

How do I know if my TLH for this year "worked"? I have a loss in capital gains this year so I'm assuming thats partly because of TLHing.

The losses were over $3k. How do I know if these carry over yearly? Is this something Vanguard automatically keeps track of or should I be telling my CPA about this?

If you have a CPA preparing your tax returns one would certainly hope he has all the data on any investment transactions you have made. So, yes, you should be telling your CPA, but in fact, I am sure he asks you for your data every year.

Where it is kept track of is with your tax return, specifically on the Capital Loss Carryforward Worksheet, which is not filed with the tax return but is to be kept with your records. If your CPA is keeping this file and not including the worksheets in the package he returns to you, that might be an issue for discussion.

Vanguard is not responsible for your income tax filings.

A helpful suggestion is that anyone should go through and do their taxes by hand at least once if not from time to time to become familiar with the procedure.