tax loss harvesting questions I haven't seen elsewhere

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ploldo
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tax loss harvesting questions I haven't seen elsewhere

Post by ploldo »

Can I do this more than once per year for each fund? I understand it might not be worth it once exceed $3000 in benefits.

The bogleheads wiki example shows a repurchase of the identical fund. I've read elsewhere the fund can be similar but not identical. I'm looking for clarification.

I had plan on having only one fund in my taxable account. (Fortunate to have a large SEP IRA). However adding two other funds, which are only SLIGHTLY less tax efficient, would triple (ignoring correlation) the opportunity for TLH throughout the year. I'm thinking the increased chances of saving $3000/year outweigh the tiny bit more in taxes I would pay yearly. Thoughts on this? The funds that I believe to have similar tax costs are VSS, VEA and VTMSX (all within .1%). I will have about $100,000 in the taxable account.
livesoft
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Re: tax loss harvesting questions I haven't seen elsewhere

Post by livesoft »

Yes, you can tax-loss harvest multiple times in one or more funds all year long. But there are usually a cost and friction every time you TLH, so you really do not want to do this often. In 2008 as I recall, I did major tax-loss harvesting moves 3 times.

The identical fund can be purchased if you wait the requisite time period which is on the 31st day after you sell. The wiki when I last read it was more about going to cash for the intervening 30-days and not going into a similar, but not substantially identical fund. Thus one's asset allocation would change for those 30 days and you would subject to possible misses of gains & losses in that 30 days. Perhaps we can ask someone to change the Wiki text.

The funds you listed are all fine in a taxable account. When you get to a TLH opportunity and do it, you will be wondering why you thought it was so difficult when you find out how really easy it actually is.
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grabiner
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Re: tax loss harvesting questions I haven't seen elsewhere

Post by grabiner »

ploldo wrote:Can I do this more than once per year for each fund? I understand it might not be worth it once exceed $3000 in benefits.
Yes, as long as you have losses. If you buy for $40,000 in March, sell for $35,000 in May, buy for $35,000 in June, and sell for $30,000 in August, you have two $5000 losses.

It is worthwhile even if the loss exceeds $3000; anything you do not deduct this year can be deducted next year. I have a huge loss from 2008 which I expect to keep using for years (or until I need to sell something for a large gain and use the carryover loss to avoid taxes).
The bogleheads wiki example shows a repurchase of the identical fund. I've read elsewhere the fund can be similar but not identical. I'm looking for clarification.
The IRS rule you are thinking of is that you have a wash sale if you buy a substantially identical fund within 30 days. Thus, if you sell Fund A for a loss and want to hold Fund A, you have to wait 31 days before buying it back. However, if you have an alternative which is not substantially identical (and which you would prefer to hold forever), you can buy the alternative on the same day.
I had plan on having only one fund in my taxable account. (Fortunate to have a large SEP IRA). However adding two other funds, which are only SLIGHTLY less tax efficient, would triple (ignoring correlation) the opportunity for TLH throughout the year.
It would increase the probability of making a harvest, but not the benefit. If you have three funds which are $10,000 each, and one of them drops by 10%, you have a $1000 loss. If you have one fund which is $10,000 each, and it drops by 10%, you have a $3000 loss; this is 1/3 as likely but three times as valuable. Thus there is no specific advantage.

And if you hold the same fund in both taxable and tax-deferred, you have a potential issue with wash sales. If you bought the fund in your IRA, then you cannot deduct a loss in your taxable account for the next 31 days. If you have harvested a loss and you reinvest dividends in the fund in your IRA, then those reinvested dividends may create a wash sale.

Therefore, there is no reason to hold three funds in your taxable account unless the size of your taxable account makes it necessary. If your taxable account is 40% of your portfolio, you probably need to hold multiple funds in your taxable account just because no single fund is 40% of your portfolio.
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ploldo
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Re: tax loss harvesting questions I haven't seen elsewhere

Post by ploldo »

Thanks for the great responses I learned a lot.

When you get to a TLH opportunity and do it, you will be wondering why you thought it was so difficult when you find out how really easy it actually is.
This is reassuring. The basics seemed easy after rereading the wiki. Good to know.


_______________

So is it typical, for a boglehead, to do a monthly check of all taxable funds for TLH? I would imagine unless it is a very good year, there are tons of TLH opportunities.

edit: how many years can losses from TLH harvesting carry over?
livesoft
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Re: tax loss harvesting questions I haven't seen elsewhere

Post by livesoft »

ploldo wrote:So is it typical, for a boglehead, to do a monthly check of all taxable funds for TLH? I would imagine unless it is a very good year, there are tons of TLH opportunities.

edit: how many years can losses from TLH harvesting carry over?
Losses carryover until you use them up or you die.

In reality there are not tons of TLH opportunities. I would say instead, unless it is a very bad year, TLH opportunities are rare. You should look often, but especially if a position is about to go long-term and in Nov-Dec.
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ploldo
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Re: tax loss harvesting questions I haven't seen elsewhere

Post by ploldo »

Are you guys buying similar funds during the 31 day waiting period? In the wiki example cash is held but I don't see how this can be better. I'm guessing for ETFs the bid/ask spread might negate any value but for indexes this seems superior.

Now I see that you can trigger a wash sale if dividends are reinvested. I hope I am not over thinking things, but is this something to worry about? Do you just choose to stop reinvesting dividends right before selling a fund to TLH?
livesoft
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Re: tax loss harvesting questions I haven't seen elsewhere

Post by livesoft »

Dividends are only paid at certain well-known dates, so one should be able to figure this out. Also, it is recommended that one not automatically re-invest dividends in a taxable account, so that also helps.

I try to buy replacement shares usually the same day. Example: Sell SCZ, buy VSS. Sell VSS, buy SCZ. Sell VEU, buy VXUS. Sell IJS, buy VBR. And on and on.
Here is an example of avoiding friction: http://www.bogleheads.org/forum/viewtop ... 01#p742901 in some detail. See the date? Was that a good date to TLH?
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retiredjg
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Re: tax loss harvesting questions I haven't seen elsewhere

Post by retiredjg »

A couple of cautions.

Vanguard has a frequent trading policy that prohibits you from buying a fund you just sold for 60 days. So you can't make your "round trip" after just 30 days. It's 60 days. However, I don't think this applies to ETFs. Vanguard also has some funds that have a redemption fee - check before you sell to be sure you've held the fund long enough. Again, this does not apply to ETFs.
I'm thinking the increased chances of saving $3000/year outweigh the tiny bit more in taxes I would pay yearly.
You don't necessarily get to save $3k a year. It could be more, it could be less.
  • -If you can offset a $10k gain with a $10k loss, you've saved the taxes on the $10k gain. That could be a bunch of different amounts, depending on your tax bracket.

    The $3k number comes in where you can offset $3k of ordinary income (as opposed to capital gains) with $3k of losses. This is not a savings of $3k, but a savings of the tax on $3k.
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Re: tax loss harvesting questions I haven't seen elsewhere

Post by JW-Retired »

Are you guys buying similar funds during the 31 day waiting period? In the wiki example cash is held but I don't see how this can be better. I'm guessing for ETFs the bid/ask spread might negate any value but for indexes this seems superior.

Now I see that you can trigger a wash sale if dividends are reinvested. I hope I am not over thinking things, but is this something to worry about? Do you just choose to stop reinvesting dividends right before selling a fund to TLH?
I TLH but have never sat out for 31 days. I always do an exchange to some other fund/ETF or combination of funds/ETFs that is roughly similar but not, in my mind, "substantially identical." Then I never exchange back at all. Why do that? Nobody has any idea what precise combination of assets is going to be better. Roughly similar assets are plenty good enough. It's a gamble to sit out of the market for 31 days, expecially if things look volatile. It is apt to be volatile at the times when I can TLH.

I don't get why the wiki says sit out for 31 days.

IMO, the main reason to not reinvest dividends is to avoid having a whole passel of cost basis lots to keep track of. If you do have a wash sale on some tiny amount of reinvested dividends it will just effect that tiny amount.
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Kevin M
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Re: tax loss harvesting questions I haven't seen elsewhere

Post by Kevin M »

retiredjg wrote: Vanguard has a frequent trading policy that prohibits you from buying a fund you just sold for 60 days. So you can't make your "round trip" after just 30 days. It's 60 days.
There are a couple of workarounds to this, so you can get back into the original fund after 30 days.
retiredjg wrote: However, I don't think this applies to ETFs.
Correct.
If I make a calculation error, #Cruncher probably will let me know.
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retiredjg
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Re: tax loss harvesting questions I haven't seen elsewhere

Post by retiredjg »

Kevin M wrote:
retiredjg wrote: Vanguard has a frequent trading policy that prohibits you from buying a fund you just sold for 60 days. So you can't make your "round trip" after just 30 days. It's 60 days.
There are a couple of workarounds to this, so you can get back into the original fund after 30 days.
Oh yes. Now that you mention it, I recall the "written instructions" workaround (as opposed to online purchase).
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Re: tax loss harvesting questions I haven't seen elsewhere

Post by Kevin M »

retiredjg wrote:
Kevin M wrote:
retiredjg wrote: Vanguard has a frequent trading policy that prohibits you from buying a fund you just sold for 60 days. So you can't make your "round trip" after just 30 days. It's 60 days.
There are a couple of workarounds to this, so you can get back into the original fund after 30 days.
Oh yes. Now that you mention it, I recall the "written instructions" workaround (as opposed to online purchase).
There's also an online workaround, but I don't want to make too much noise about it. I understand that Vanguard monitors Bogleheads, and I don't want to give them reason to shut off this workaround (but I think it's mentioned in the wiki somewhere). I learned about it here.

Kevin
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