Wealthfront updates tax loss harvesting software

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grp2c
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Joined: Sat Mar 08, 2014 4:51 pm

Wealthfront updates tax loss harvesting software

Post by grp2c »

https://blog.wealthfront.com/tax-loss-h ... 2nVrUNqaQF

On their updated whitepaper they state, "We will then hold that alternative ETF in your portfolio for a minimum of 30 days to avoid wash sales (described below). We will not sell the alternative ETF until it can be sold for a loss (which will generate additional tax-loss harvesting benefit)."

I believe this should alleviate the negative tax arbitrage issue explained in betterment's TLH+ whitepaper.
FinancialDave
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Re: Wealthfront updates tax loss harvesting software

Post by FinancialDave »

I suspect their software is really "churning" this week!

fd
I love simulated data. It turns the impossible into the possible!
boggler
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Re: Wealthfront updates tax loss harvesting software

Post by boggler »

They don't account for the cost of holding the secondary ETF indefinitely. For example, if they switch to an ETF that is higher cost, that cost might end up being paid year after year for 30 years. Similarly, if they switch to an ETF that doesn't perfectly represent the target asset class, such as a fund lacking small caps, that might have a large effect over time.
alexfrey
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Re: Wealthfront updates tax loss harvesting software

Post by alexfrey »

Also doesn't seem like a lot of these TLH marketing pieces are accounting for the fact that there may never be an opportunity to sell a position for a loss again. Markets do, after all, tend to go up over time.
mwm158
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Re: Wealthfront updates tax loss harvesting software

Post by mwm158 »

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zaboomafoozarg
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Re: Wealthfront updates tax loss harvesting software

Post by zaboomafoozarg »

mwm158 wrote:I swear stuff like this is just begging the IRS to better enforce the wash sale rules. These schemes are shady, knowing full well the shares being purchased immediately after are nearly identical to what was sold. I think it's fraud.
If they are tracking different indexes, then it would seem they are not substantially identical.
GregR
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Re: Wealthfront updates tax loss harvesting software

Post by GregR »

I don't entirely understand the benefit of tax harvesting.

You're going to realize your net capital gains now or later. So isn't this deferring your taxes without reducing them? Is the idea that you gain returns on what would have been paid out as taxes during the period when taxes are delayed? Is that large enough to merit modifying your portfolio allocation from what you consider ideal (to avoid wash sales)?

I suspect I'm missing something.
Wagnerjb
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Re: Wealthfront updates tax loss harvesting software

Post by Wagnerjb »

grp2c wrote:https://blog.wealthfront.com/tax-loss-h ... 2nVrUNqaQF

On their updated whitepaper they state, "We will then hold that alternative ETF in your portfolio for a minimum of 30 days to avoid wash sales (described below). We will not sell the alternative ETF until it can be sold for a loss (which will generate additional tax-loss harvesting benefit)."

I believe this should alleviate the negative tax arbitrage issue explained in betterment's TLH+ whitepaper.
Could you provide us a link to the TLH+ whitepaper?

Thanks.
Andy
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Re: Wealthfront updates tax loss harvesting software

Post by placeholder »

mwm158 wrote:I swear stuff like this is just begging the IRS to better enforce the wash sale rules. These schemes are shady, knowing full well the shares being purchased immediately after are nearly identical to what was sold. I think it's fraud.
Then the IRS should have issued extensive guidance on the subject years ago and in my interpretation of the law I believe "substantially identical" is a very high bar which funds tracking different indexes do not clear so I don't see any fraud.
Topic Author
grp2c
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Re: Wealthfront updates tax loss harvesting software

Post by grp2c »

Here's the betterment TLH+ white paper

https://www.betterment.com/resources/re ... ite-paper/
randomguy
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Re: Wealthfront updates tax loss harvesting software

Post by randomguy »

GregR wrote:I don't entirely understand the benefit of tax harvesting.

You're going to realize your net capital gains now or later. So isn't this deferring your taxes without reducing them? Is the idea that you gain returns on what would have been paid out as taxes during the period when taxes are delayed? Is that large enough to merit modifying your portfolio allocation from what you consider ideal (to avoid wash sales)?

I suspect I'm missing something.
There are 3 big things
1) You get to write off 3k of losses against OI.
2) It is better to pay 3k in taxes in 10 years than 3k in taxes today if everything else is equal.
3) You might expect to be in a lower bracket at the point they are selling (i.e. selling after retirement) OR they plan on donating the highly appreciated shares.

Is the gain as much as those white papers suggest? Probably not.

As far as modifying the portfolio, I would have a hard time arguing that VTI vs ITO vs SCHB will make any difference in 30 year. Heck I could even be talked into preferring IEMG to VWO (more small caps. Might make up for the .03% higher ER).
FinancialDave
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Re: Wealthfront updates tax loss harvesting software

Post by FinancialDave »

Is the gain as much as those white papers suggest? Probably not.
Let's be real, there is absolutely no way to predict whether there will be ANY gain at all.

By the very nature of this "harvesting" you are selling your investments at a loss! That is the one true fact of this discussion.

fd
I love simulated data. It turns the impossible into the possible!
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