Tax Loss Harvesting - key points to keep in mind

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
sman09
Posts: 320
Joined: Fri Mar 23, 2018 12:02 am

Tax Loss Harvesting - key points to keep in mind

Post by sman09 »

We would be opening an IRA account for the first time this year. We were very late to understanding the importance of investment and started putting money in the market only as we were approaching 40s. In trying to keep things simple until we were comfortable and also because of a very uncertain financial/job situation had not considered contributing to IRA till now. We had started contributing to even a 401k account only since 2018 (thanks to the kind guidance from here).

I recall from some posts here that one needs to take in to account investments within IRA accounts also while planning tax loss harvesting although not quite sure i understand it well. Please correct me if I'm stating this in error. I had also read the BH wiki post on TLH and still not quite sure i understand it well.

Because we do not have that strong a financial situation or job security to see our investment reduce a substantial chunk after lump sum investment and still sleep peacefully at night, we have been doing a variation of dollar cost averaging - which is to have a small amount of money be invested in the total market fund ETF every week in our taxable account. We have automated this. We were not sure if such an action would potentially disqualify us from being able to TLH at any point in time.

Starting this thread to request if fellow BH could share the essence of what you have learned about Tax Loss Harvesting that would come handy to someone new to it.

Such as
- Dos/Don'ts,
- how to structure taxable/IRA investments etc.,
- whether only buying the same investment within 30 days of selling would be a wash-sale or even having bought the same investment within the 30 days period prior to selling would lead to wash-sale etc.,
- which combination of funds/ETFs would not trigger wash-sale etc,...

Any other thoughts and personal experience with TLH would also greatly help.

Thank you.
jebmke
Posts: 12860
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Tax Loss Harvesting - key points to keep in mind

Post by jebmke »

I normally keep a short list of TLH pairs -- where I would move the money to when selling the asset with the loss. Each destination must be something I'm willing to hold forever. The new asset may never show a loss in the future and I may end up holding it a long time. Fortunately Vanguard has a lot of alternatives that line up well and makes this fairly easy. The last domestic TLH I did was in 2009. I have a hard time seeing any future opportunities for us, given the current basis in the assets we now hold. I don't have any intention of selling equity, short of having unrealized losses, ever again.
When you discover that you are riding a dead horse, the best strategy is to dismount.
User avatar
rob
Posts: 3613
Joined: Mon Feb 19, 2007 6:49 pm
Location: Here

Re: Tax Loss Harvesting - key points to keep in mind

Post by rob »

jebmke wrote: Thu May 13, 2021 5:24 pm Each destination must be something I'm willing to hold forever.
Cannot emphasise this enough.... assume you will hold BOTH....
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
User avatar
Strifey
Posts: 39
Joined: Thu Apr 01, 2021 4:15 pm

Re: Tax Loss Harvesting - key points to keep in mind

Post by Strifey »

I've been researching this alot the past month and recently TLH for the first time with yesterday's market drop.

This is what I've learned from reading the forum and various articles online but someone can correct me if I'm wrong:

1. You are correct that you should take into account holdings in an IRA, I'm coming at this from a simple 3 fund portfolio. What was recommended to me was to hold a mutual fund index in my IRA (I use FSKAX Fidelity Total Market Index Fund as my accounts are with Fidelity). I hold my Bonds, Total International, and some US Total Market in my 401K which can be ignored for this exercise.

2. In my taxable account I hold the rest of my U.S. equity, but I use total market ETFs that don't create any wash sale issues with FSKAX in my Roth IRA.

3. For my taxable account I have 4 funds written down that can be used for TLH purposes, these are VTI, ITOT, SCHB, and SPTM. They are all near total market ETFs that have pretty much identical performance and ERs, but apparently have different enough holdings that the general consensus is they can be used for TLH.

I personally would be fine holding any of these 4 funds, I started with VTI a few months ago after consolidating my taxable account into a 3 fund portfolio and just TLH into SCHB yesterday for a -$2.7K TLH (which has gone back up today, so yay basically free money on my taxes).

After 30 days I will continue to contribute to VTI and if the situation comes up I could either TLH into SCHB again, or if I have a loss in both VTI and SCHB I could TLH both into ITOT.

At some point you may have funds in multiple ETFs based on your future contribution cost basis since you would only TLH specific lots that had a loss.. so you could potentially have some really old lots that have a low cost basis and you may never be able to TLH, so they just sit in VTI and SCHB for example.

Also turn off DRIP and manually invest your dividends for a situation like the above, because you don't want your DRIPs going into multiple ETFs or triggering contributions that result in wash sales, you want to manually invest them into the one specific index you currently decide to contribute to.

I haven't had to deal with the 30 days prior yet but the way I'm reading it is that you can't sell to TLH if you also purchased into a fund 30 days prior to selling.. so your automatic DCAing could cause issues based on timing.

Also it sounds like the worst case is that the IRS says you had a wash sale and you can't use the loss to offset your income/capital gains. So basically you spent 10 min TLH but you don't get the benefit... putting you back where you started anyways. Not that big of a deal.

I'm no expert but that's what I've learned, I also would love to know if there is anything incorrect with what I'm saying though :)
Topic Author
sman09
Posts: 320
Joined: Fri Mar 23, 2018 12:02 am

Re: Tax Loss Harvesting - key points to keep in mind

Post by sman09 »

Thank you jebmke & Rob for your inputs. That's a good reminder!

Thank you Strifey for the detailed inputs. Really appreciate the time you have taken to share the inputs.

Referring to your post, had these follow-up questions
Strifey wrote: Thu May 13, 2021 10:36 pm
2. In my taxable account I hold the rest of my U.S. equity, but I use total market ETFs that don't create any wash sale issues with FSKAX in my Roth IRA.
apologies for this naive question - is one allowed to sell the holdings in one's IRA and replace it with another or is it always done in the taxable account?

Strifey wrote: Thu May 13, 2021 10:36 pm
3. For my taxable account I have 4 funds written down that can be used for TLH purposes, these are VTI, ITOT, SCHB, and SPTM. They are all near total market ETFs that have pretty much identical performance and ERs, but apparently have different enough holdings that the general consensus is they can be used for TLH.
This is great information - thanks for sharing! Just out of curiosity, how did you identify these funds - as in, where is this information readily available?

Strifey wrote: Thu May 13, 2021 10:36 pm I personally would be fine holding any of these 4 funds, I started with VTI a few months ago after consolidating my taxable account into a 3 fund portfolio and just TLH into SCHB yesterday for a -$2.7K TLH (which has gone back up today, so yay basically free money on my taxes).

Congratulations! I wanted to do one myself and that got me thinking about TLH in light of my regular purchases.

Strifey wrote: Thu May 13, 2021 10:36 pm After 30 days I will continue to contribute to VTI and if the situation comes up I could either TLH into SCHB again, or if I have a loss in both VTI and SCHB I could TLH both into ITOT.

It looks like you probably use a spreadsheet to track all your investments in taxable/IRA along with date? if so, is automation of investments a bad idea when it comes to TLH
Strifey wrote: Thu May 13, 2021 10:36 pm
I haven't had to deal with the 30 days prior yet but the way I'm reading it is that you can't sell to TLH if you also purchased into a fund 30 days prior to selling.. so your automatic DCAing could cause issues based on timing.

Also it sounds like the worst case is that the IRS says you had a wash sale and you can't use the loss to offset your income/capital gains. So basically you spent 10 min TLH but you don't get the benefit... putting you back where you started anyways. Not that big of a deal.

I'm no expert but that's what I've learned, I also would love to know if there is anything incorrect with what I'm saying though :)
That is very helpful to know. Also, reading replies to a latest thread, I found this post also useful to clarify my understanding - aligns with what you said.

(because there are so many threads on any topic and great information is embedded within one of several posts, I thought this new post may help collate all such wisdom in one place (at least for now until another post comes up with a similar request)
TropikThunder wrote: Thu May 13, 2021 11:36 pm The only time you have to worry about it is when the market drops and you want to book the loss in taxable. The rule says you can't buy the same security within 30 days of the TLH sale. Actually, the term is "substantially identical" but it's never been satisfactorily defined by the IRS.

Think about it though: if you are going to TLH VTSAX in your taxable account and switch to VFIAX for example, you're going to sell all of it, right? No sense in just harvesting the loss on some of your VTSAX shares. So let's say your IRA has $50,000 in it, and you contribute $500/month. Your taxable also has $50,000 in it. The market drops 20%, and you TLH the now-$40,000 of VTSAX in your taxable. OMG NOOOOOO YOU ALREADY MADE YOUR IRA CONTRIBUTION!! Big deal, $500 of the wash is disallowed and you only get to claim $9,500. The within-30-days purchase doesn't ruin the whole TLH transaction, just the portion matching that purchase. It's not that big a deal IMO, and I would not use that as a reason to switch your holdings around. Plus, all a wash sale does is defer the gain until some time in the future, it doesn't avoid the tax entirely. At best you defer it to a year that you're in a lower tax bracket.
It is great to know that only that part of the investment would not be deemed a candidate for TLH. I thought in investing in VTSAX/VTI in the last 30 days, my eligibility to TLH all the investments made in them becomes nullified.

I'm not sure i understand this part though
TropikThunder wrote: Thu May 13, 2021 11:36 pm Plus, all a wash sale does is defer the gain until some time in the future, it doesn't avoid the tax entirely. At best you defer it to a year that you're in a lower tax bracket.

Thank you!
User avatar
Strifey
Posts: 39
Joined: Thu Apr 01, 2021 4:15 pm

Re: Tax Loss Harvesting - key points to keep in mind

Post by Strifey »

sman09 wrote: Fri May 14, 2021 12:26 am apologies for this naive question - is one allowed to sell the holdings in one's IRA and replace it with another or is it always done in the taxable account?
I mean you can but there's no benefit since you aren't creating a taxable event when you rebalance funds in an IRA so there's nothing to harvest. You can sell buy/holdings to change you portfolio strategy or to rebalance to your desired ratios (i.e. 80 stocks/20 bonds), but you wouldn't be doing anything related to TLH. For TLH purposes yes this is always done in a taxable account.
sman09 wrote: Fri May 14, 2021 12:26 am This is great information - thanks for sharing! Just out of curiosity, how did you identify these funds - as in, where is this information readily available?
Just googling and looking in various forums/articles, those funds and a couple others come up alot for TLH purposes.
sman09 wrote: Fri May 14, 2021 12:26 am It looks like you probably use a spreadsheet to track all your investments in taxable/IRA along with date? if so, is automation of investments a bad idea when it comes to TLH
Yes I'm not a fan of automation but I keep pretty on top of my stuff. I don't really track transactions in my 401K because it's a pain, but I generally just put $6K in a Roth IRA once a year in Q1, and contribute maybe once a month to taxable so I don't have a ton of transactions to keep track of. Fidelity makes it easy to track the cost basis of each trade as well in the UI so really you don't have to track much. Just sell all the lots that are above the current day's price when the market corrects.

Also I read more into the 30 day prior rule and this thread was very helpful:
viewtopic.php?t=240651

It sounds like as long as you sell all lots that you purchased 30 days prior and don't buy any more for the next 31 days then you should be good. It doesn't mean you can't TLH at all if you purchased shares within 30 days before you sold, just that you can't keep them if you sell other shares.
livesoft
Posts: 76590
Joined: Thu Mar 01, 2007 8:00 pm

Re: Tax Loss Harvesting - key points to keep in mind

Post by livesoft »

More key points:

A wash sale is not illegal.

A wash sale is not the end of the world.

A wash sale requires no more lines on your tax return than a non-wash sale.

If you have ever missed a turn or a freeway exit while driving, then you circle around and go back and make your turn. That's basically what a wash sale is like.
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
climber2020
Posts: 1948
Joined: Sun Mar 25, 2012 8:06 pm

Re: Tax Loss Harvesting - key points to keep in mind

Post by climber2020 »

No need to make it complicated.

I hold the same two funds in the same proportions in both my Roth and Taxable: Total Stock and Total International.

If a tax loss harvesting opportunity comes up, then I do it. If it's around dividend time, which is only 4 times a year and is predictable each time, then I turn off automatic reinvestment of dividends until the wash sale period passes.
User avatar
RickBoglehead
Posts: 6657
Joined: Wed Feb 14, 2018 9:10 am
Location: In a house

Re: Tax Loss Harvesting - key points to keep in mind

Post by RickBoglehead »

The wiki links to another site for wash sale info. Have you read it? https://fairmark.com/investment-taxatio ... gain/wash/
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
Post Reply