tax-loss harvesting question

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Topic Author
xram
Posts: 780
Joined: Sat Sep 15, 2012 11:36 am

tax-loss harvesting question

Post by xram »

Code: Select all

2013-05-24		VWO		?
2013-05-13		VWO		?
2013-05-06		VWO		?
2013-04-12		VWO		
2013-04-12		VWO		?
2013-04-04		VWO		
2013-04-03		VWO		
2013-03-28		VWO		?
2013-03-21		VWO		
2013-03-19		VWO		
2013-03-15		VWO		?
2013-03-04		VWO		?
2013-02-28		VWO		?
2013-02-25		VWO		?
2013-02-22		VWO		?
2013-02-21		VWO		?
2013-02-04		VWO		?
2012-12-27		VWO		?
2012-10-10		VWO
I have never tax-loss harvested before.

The "30 days before" portion of the rule is confusing to me.

Could I sell the shares purchased on the dates indicated with question marks(?) without causing a wash sale?
(-and buy SCHE or IEMG right afterwards)

Also, what is a good substitute for VWO? This account is held in taxable at Vanguard.
SCHE?
IEMG?

Thank you very much,
xram
Last edited by xram on Fri May 31, 2013 8:10 am, edited 1 time in total.
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mnvalue
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Re: tax-loss harvesting question

Post by mnvalue »

As I understand it, the rule applies to the sale, not the purchase. You need to wait 30 days from your last purchase (2013-05-24) and then after you do the sale, not purchase any more of that security (or something "substantially identical") for 30 days after the sale. Do some more research before you trust my answer, though.
Topic Author
xram
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Re: tax-loss harvesting question

Post by xram »

Thanks
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House Blend
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Re: tax-loss harvesting question

Post by House Blend »

xram wrote:Could I sell the shares purchased on the dates indicated with question marks(?) without causing a wash sale?
(-and buy SCHE or IEMG right afterwards)
Yes.

As long as you sell the recent lots, dated 05/24, 05/13, 05/06, then there is no wash sale.

Or as a thought experiment, you could do it in slow-motion. Sell the others, and keep the May shares, thereby creating a wash sale. Then sell the May shares a day later, and you get to claim the losses that were held up by the wash. The net effect is the same, aside from being exposed to one more day of market uncertainty.
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dratkinson
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Re: tax-loss harvesting question

Post by dratkinson »

It's been a few years since I last TLHed, so I may be forgetting something.


Wash sale issues. A wash sale is created if *replacement shares are bought in any family account within +-30 days of your TLH date. (*Replacement shares can be bought by a direct purchase or a distribution reinvestment.)

In your example, to avoid all wash sale issues, wait until after 6/25 (+31 days from your last purchase on 5/24) to TLH.

Uncle sugar looks at ALL holding in ALL family investment accounts and assumes you have control over your family's investing. For this reason, it is considered a wash sale if you sell/TLH in your taxable account, but your spouse buys replacement shares of the same fund in any accounts (within +-30 days), or allows an automatic distribution to buy replacement shares in any accounts (within +-30 days).

Hold only non-duplicate assets to avoid wash sale issues. Because of the IRS family-accounts problem with wash sales, we are advised to hold only unique (non-duplicate) assets in all of our family accounts. (In your family, you are the only one to own VWO and it is only in one account.)

Don't reinvest distributions to avoid wash sale issues. Because of the IRS family-accounts problem with wash sales, we are advised to not automatically reinvest distributions.



Additional problems which may be caused by TLHing.

Qualified dividend income issues. QDI distributions lose tax-preferred treatment if sold/TLHed shares are owned less then 60 days. Must own all shares in taxable accounts for +61 days to protect any QDI status.

Tax-exempt income issues. TE bond fund income loses tax-preferred treatment if sold/TLHed shares are owned less than half a year. Must own all tax-exempt bonds shares for +184 days to protect TE income status.



I followed above guidelines to avoid problems with wash sales, losing QDI tax-preferred status, or losing TE income tax-preferred status when I last TLHed. (Reminders are listed on my pre-sale transaction checklist.)

I've coded my Excel tracking spreadsheet to compute the number of days I've owned each share lot. That's how I remember all of this stuff.

I may have forgotten something.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
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Tortoise
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Re: tax-loss harvesting question

Post by Tortoise »

I always go to the source (IRS) for questions like these.

http://www.irs.gov/publications/p550/ch ... k100010601
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Calm Man
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Re: tax-loss harvesting question

Post by Calm Man »

I don't get it. If you buy stock today and it crashes and you sell it tomorrow, it looks like that isn't a wash sale because it was only bought once, right>

But if you already owned the stock and then bought yesterday and sold today at a loss, is that a wash sale? Or is it only if you still hold some of the position and not a wash sale if you sold the whole position?
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House Blend
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Re: tax-loss harvesting question

Post by House Blend »

Calm Man wrote:But if you already owned the stock and then bought yesterday and sold today at a loss, is that a wash sale? Or is it only if you still hold some of the position and not a wash sale if you sold the whole position?
Wash sales depend on which shares you sold, and which you kept (bought).

I hope this example helps:

Feb 10: buy 100 shares XYZ for $1100
May 30: buy 100 shares XYZ for $1000.

On June 3, the share price is $9.

You sell the Feb shares for $900, netting a loss of $200. This is a wash sale. The loss gets added to (subtracted from?) the basis of the May shares. Those May shares now have a cost basis of $1200, and you don't get to claim the loss on your taxes.

On June 4, the share price is still $9.

You sell the 100 May shares for another $900. This is not a wash sale. Your cost basis is $1200, so you get a $300 capital loss that you can claim when you file your taxes.

You could have accomplished the same thing with less fuss by selling all 200 shares at once on June 3. You still net a loss of $300, but there is no intermediate wash sale step.
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xram
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Re: tax-loss harvesting question

Post by xram »

House Blend wrote:
xram wrote:Could I sell the shares purchased on the dates indicated with question marks(?) without causing a wash sale?
(-and buy SCHE or IEMG right afterwards)
Yes.

As long as you sell the recent lots, dated 05/24, 05/13, 05/06, then there is no wash sale.

Or as a thought experiment, you could do it in slow-motion. Sell the others, and keep the May shares, thereby creating a wash sale. Then sell the May shares a day later, and you get to claim the losses that were held up by the wash. The net effect is the same, aside from being exposed to one more day of market uncertainty.
thanks
Mr House Blend, or anybody else....
any ideas what would be an acceptable "not substantially identical" ETF to purchase with the funds from the sale?
i appreciate the help
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alexbgh
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Re: tax-loss harvesting question

Post by alexbgh »

House Blend,

In your example, if you use specific identification of shares and sell May 30 shares on June 3 and leave Feb shares, it is not going to be a wash sale, is it correct?

Thank you
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House Blend
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Re: tax-loss harvesting question

Post by House Blend »

any ideas what would be an acceptable "not substantially identical" ETF to purchase with the funds from the sale?
This is a very popular FAQ here on BH. (Not emerging markets specifically, but questions about whether two funds are "substantially identical".)

There's no definitive answer to this, and some disagreement among BHs.

The rule of thumb that I use is that if index fund X and index fund Y track the *same* index, then they are substantially identical. So for example, trading shares of VG 500 index for Fidelity 500 index is a wash. But trading shares of (say) IWM (a Russell 2000 index fund) for shares of VSMAX (VG Small Cap index) is not, even though both are small cap indexes.

Others are free to disagree.
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House Blend
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Re: tax-loss harvesting question

Post by House Blend »

alexbgh wrote:In your example, if you use specific identification of shares and sell May 30 shares on June 3 and leave Feb shares, it is not going to be a wash sale, is it correct?
Correct.
dbr
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Re: tax-loss harvesting question

Post by dbr »

House Blend wrote:
alexbgh wrote:In your example, if you use specific identification of shares and sell May 30 shares on June 3 and leave Feb shares, it is not going to be a wash sale, is it correct?
Correct.
I suspect when it comes to tax loss issues there is much advantage to specific share identification to make absolutely sure what is what. An alternative is to sell everything which might technically generate a wash sale, but on the "no harm, no foul" theory washes out on tax cost after all the basis corrections and losses and gains are tabulated.

There is another thread on the forum where Vanguard has apparently munged the specific ID process in the presence of a wash sale much to the consternation of the investor posting.
Topic Author
xram
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Re: tax-loss harvesting question

Post by xram »

House Blend wrote:
xram wrote:Could I sell the shares purchased on the dates indicated with question marks(?) without causing a wash sale?
(-and buy SCHE or IEMG right afterwards)
Yes.

As long as you sell the recent lots, dated 05/24, 05/13, 05/06, then there is no wash sale.
So, as long as I sell ALL the lots that I have purchased during the PREVIOUS 30 days and dont buy any new VWO (or substantially identical ETF) within the next 30 days, it would NOT be a WASH SALE?

Is that the take-home idea?

thanks
xram
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Topic Author
xram
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Re: tax-loss harvesting question

Post by xram »

If an investor sells shares/lots That we're acquired as dividends but then decreased in value,, how does this affect the decision to TLH versus shares that were purchased?

Gotta pay taxes on dividends obviously? So loss must be significant to make up for tax burden?

Sorry for beginner level question. I have never yet sold shares in a taxable account and/or tax loss harvested yet.

Thanks
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grabiner
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Re: tax-loss harvesting question

Post by grabiner »

xram wrote:If an investor sells shares/lots That we're acquired as dividends but then decreased in value,, how does this affect the decision to TLH versus shares that were purchased?

Gotta pay taxes on dividends obviously? So loss must be significant to make up for tax burden?
As far as the IRS is concerned, reinvesting a dividend is the same as receiving the dividend in cash and then using the cash to buy more shares. You are liable for tax on the dividend as soon as it is received, whether you reinvest it in the same fund or deposit it in your bank account.

Thus, if you are doing a TLH, you should sell any shares purchased with reinvested dividends on which you have a loss, and also any shares purchased with reinvested dividends which would cause a wash sale if you don't sell them.

Example:
Previous years: hold shares bought for less than $30.
March: Receive $297 dividend, reinvest in 11 shares for $27.
April: Buy 100 shares for $28.
June: Receive $320 dividend, reinvest in 10 shares for $32.
July: Buy 100 shares for $33.
September 23: Receive $338 dividend, reinvest in 12 shares for $29 as the market drops.
September 25: Decide to TLH with the price at $30.

You want to sell the July shares because you have a $3 loss, and the June shares because you have a $2 loss. You also need to sell the September shares; otherwise, you would have a wash sale because you sold shares for a loss two days after buying shares. You do not need to sell the March shares or April shares; you have a gain on those shares, and they will not create a wash sale because you bought them more than 30 days before your sale.

So you sell the June, July, and September shares, with a capital loss of $20 for June, a capital loss of $300 for July, and a capital gain of $12 for September, a total short-term loss of $308. You will also owe income tax on the $955 of dividends (and on whatever dividends you receive in December).
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dratkinson
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Re: tax-loss harvesting question

Post by dratkinson »

xram wrote:If an investor sells shares/lots That we're acquired as dividends but then decreased in value,, how does this affect the decision to TLH versus shares that were purchased?

Gotta pay taxes on dividends obviously? So loss must be significant to make up for tax burden?

Sorry for beginner level question. I have never yet sold shares in a taxable account and/or tax loss harvested yet.

Thanks
Yes, you pay taxes on all distributions on Sch B. That money is cash. If you ask Vanguard to send it to your checking account, you can write checks on it and no additional tax reporting is required.

Additional tax reporting is only required if you use that cash to buy more shares and then sell them.



Reporting the sale of multiple small lots.

You may be thinking of the reporting burden when you allow distributions to be automatically reinvested, thereby creating many small lots needing to be reported.

Most recommend redirecting all distributions to your MM or savings account and only buying new fund lots to rebalance. In this way, you can buy >$1K lots at a time. Then it is easier to TLH when you have fewer/larger lots to report. And easier to compute the size of the total TLH potential.

In 2008, when I first TLH, I stopped automatically reinvesting distributions and cleaned up/sold all my small lots. Yes it was a pain talking to the CSR to sell 0.015 shares of TSM, but not too bad if you write down and double-check every lot description before you make the call.

To report the single-date sale of many small lots (each with a different purchase dates), you use the IRS keyword "Various" to report the original lots' purchase dates.

Example: Assume you have 10 small lots of TSM to report on Sch D. You bought the 10 lots for $20K (total) on 10 separate dates. You sold the 10 lots for $10K (total) on 1 Nov 2008. On Sch D, you report the sale of the 10 lots on one line as:

Description: TSM, xx.xxx shares sold
Sale date: 1 Nov 2008
Sale price: $10K
Purchase date: Various (this is how you accounted for the 10 separate purchase dates)
Purchase price: $20K
Result: $10K loss.

So the tax reporting of multiple small lots is not that bad, and will be made easier by buying larger lots.

I sold some shares last year and a new tax form (to list each transaction) has been added to make the Sch D (now a summary of all transactions) simpler. Otherwise, the tax software handled everything. I just entered the same old transactions information and two forms, instead of one, were generated. Efiled and it as all transparent to me.



How do you compute the size of your potential TLH?

With multiple small lots and pencil and paper tracking, it is a pain.

In 2008, with multiple small lots and Excel to track my investments, I modified my Excel spreadsheet to compute and total my potential TLH opportunity for every lot of every fund I owned. (Easy enough to compute the loss/gain on each lot, then total my TLH potential.)

So, if you use Excel to track your investments, adding the coding to compute/total any TLH opportunity is easy enough to do. Then you don't really care about the size of each lot... except for the hassle of selling numerous small lots.

Being lazy, my IPS calls for TLHing when my total TLH potential is >$3K from all assets.
Last edited by dratkinson on Sun Jun 02, 2013 9:51 am, edited 1 time in total.
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RNJ
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Re: tax-loss harvesting question

Post by RNJ »

I thought this was much simpler. Assuming all shares are spec i.d.,:

In order to TLH, I need to

1) own i.d.'d shares at least 30 days

2) sell them (at a loss)

3) turn around and purchase shares of similar type (VWO->IEMG), and either

4) hold those shares for at least 30 days, then sell them and re-purchase original shares, or

5) hold the new shares.

If the newly purchased shares decline in value and I hold them for at least 30 days I can sell them and return to original shares and reap another short term loss.

If the newly purchased shares rise in value, I keep them.

What am I missing?
Last edited by RNJ on Mon Jun 03, 2013 5:52 am, edited 1 time in total.
Topic Author
xram
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Re: tax-loss harvesting question

Post by xram »

This website

https://www.ivyvest.com/blog/posts/how- ... harvesting

Suggests

SCHE
EEM

As substitutes for VWO when TLHing.

Anybody used these?

Any problems?

Thanks
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RNJ
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Re: tax-loss harvesting question

Post by RNJ »

xram wrote:This website

https://www.ivyvest.com/blog/posts/how- ... harvesting

Suggests

SCHE
EEM

As substitutes for VWO when TLHing.

Anybody used these?

Any problems?

Thanks
I prefer IEMG (.18 ER). It's cheaper than EEM and reaches down further into mid and small caps than EEM or SCHE. It's a holding I can live with for the long term.
Topic Author
xram
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Re: tax-loss harvesting question

Post by xram »

RNJ wrote:
xram wrote:This website

https://www.ivyvest.com/blog/posts/how- ... harvesting

Suggests

SCHE
EEM

As substitutes for VWO when TLHing.

Anybody used these?

Any problems?

Thanks
I prefer IEMG (.18 ER). It's cheaper than EEM and reaches down further into mid and small caps than EEM or SCHE. It's a holding I can live with for the long term.
And "not substantially similar" enough to cause wash sale?
Thanks


Is there not a table or list of commonly accepted fund substitutions for different MF/ETFs in order to avoid wash sale?
Thanks
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RNJ
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Re: tax-loss harvesting question

Post by RNJ »

xram wrote:
RNJ wrote:
xram wrote:This website

https://www.ivyvest.com/blog/posts/how- ... harvesting

Suggests

SCHE
EEM

As substitutes for VWO when TLHing.

Anybody used these?

Any problems?

Thanks
I prefer IEMG (.18 ER). It's cheaper than EEM and reaches down further into mid and small caps than EEM or SCHE. It's a holding I can live with for the long term.
And "not substantially similar" enough to cause wash sale?
Thanks


Is there not a table or list of commonly accepted fund substitutions for different MF/ETFs in order to avoid wash sale?
Thanks
VWO uses the FTSE index. IEMG uses MSCI. More than a cosmetic difference. As I wrote earlier, IEMG has a smaller market cap. More importantly, it includes South Korea. VWO does not.
Last edited by RNJ on Mon Jun 03, 2013 5:50 am, edited 1 time in total.
Default User BR
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Re: tax-loss harvesting question

Post by Default User BR »

xram wrote:And "not substantially similar" enough to cause wash sale?
The criterion is substantially identical, not similar.
xram wrote:Is there not a table or list of commonly accepted fund substitutions for different MF/ETFs in order to avoid wash sale?
There is not. The IRS has issued no guidance. Anything other than the identical holding (or share classes of, as exchanges between them can be non-taxable) is guesswork.

People spend an inordinate amount of time worrying about wash sales.


Brian
Topic Author
xram
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Re: tax-loss harvesting question

Post by xram »

Thanks

When/How do you guys/gals decide to TLH?

Is it a number value? (I.e. fund down $1000 dollars or more)?

Is it a percentage value (I.e. fund down 20% or more)?

Thanks
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dratkinson
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Re: tax-loss harvesting question

Post by dratkinson »

xram wrote:...
When/How do you guys/gals decide to TLH?
...
Like I said above, when my total TLH potential is >$3K. (This caused me to miss a $2K TLH last year, but as I still have the higher cost basis, I can use it later. And if I move into a higher tax bracket, a higher cost basis will be more valuable then.)
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