Question on Tax Loss Harvesting

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xrw1
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Question on Tax Loss Harvesting

Post by xrw1 » Thu Mar 12, 2015 3:16 pm

Hi everyone,

I have a taxable account that is invested in Vanguard Total Stock Market (VTSAX) and Vanguard Total International (VTIAX). Currently these have reinvestment turned on.

I will be turning off my reinvestments for my taxable account and roth ira soon. I want to get my accounts set up for a TLH if there is a chance in the future.

Questions:

1. How do I know if my funds are different enough from my other accounts (Roth IRA and 401k) that it won't cause a wash sale?
For example: If I sold VTSAX from my taxable for an Vangaurd S&P500 index, will the purchasing of the FUSEX (Fidelity Spartan 500 index) and FSEMX (Fidelity Spartan Extended market) in my 401k cause a wash sale? or will the wash sale happen when I sell the Vanguard S&P500 index later down the road since I am purchasing FUSEX in my 401k

2. Also is there a Wiki page or a database that provides the information to know if funds are substantially similar or not?

3. For my Vanguard taxable account, where should I direct my reinvestment funds to? Should I have them deposited in my bank account?

4. Do you guys see an instance in my holdings that may cause a potential wash sale? (assume that I have reinvestment turned off at this point)


Holdings:

Taxable account
VTSAX (Vanguard Total Stock Market)
VTIAX (Vanguard Total International)

Roth IRA
VTIAX (Vanguard Total International)
VBMFX (Vanguard Total Bond)
VISVX (Vanguard Small Cap)

401k
FUSEX (Fidelity Spartan 500 index)
FSEMX (Fidelity extended market)
REREX (American Funds -Euro Pacific Growth)
FTBFX (Fidelity total bond)



Thank you very much!

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powermega
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Re: Question on Tax Loss Harvesting

Post by powermega » Thu Mar 12, 2015 4:14 pm

1. I don't think there is much of a real hard rule about what constitutes the "same" investment, other than investments actually being the same fund (same ticker symbol, or even different share classes of the same fund). I imagine two funds that invest in the same index (ex: S&P 500) would fit the definition of the "same" investment too, so you could have a wash sale if you sold the Vanguard S&P 500 fund in taxable for a tax loss and bought the Fidelity S&P 500 fund in your 401k within 31 days of that sale. Selling a total stock market index fund in taxable and buying the S&P 500 and extended market funds in your 401k would not be a wash, as far as I understand it.

2. Not that I know of. If you find one, please post it in this thread!

3. A money market fund or a sweep fund of some kind (something that doesn't change in value) is where you could direct your distributions.

4. The biggest risk is between your 401k and your taxable account since your 401k will likely have periodic payroll contributions at least once a month. (I don't know how often you contribute to your rIRA, but I'm assuming it's once or twice per year.) The fact that your taxable account has "different" investments than your 401k makes the chances of triggering a wash sale like that unlikely. With reinvestment of distributions turned off in your rIRA too, you could manually reinvest in your rIRA and taxable at the same time. You really only need to turn off automatic reinvestment of distributions in your rIRA for securities that are the "same" between your rIRA and taxable, which happens to only be VTIAX.
Last edited by powermega on Thu Mar 12, 2015 8:55 pm, edited 1 time in total.
Even a stopped clock is right twice a day.

Rox
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Re: Question on Tax Loss Harvesting

Post by Rox » Thu Mar 12, 2015 6:28 pm

powermega wrote:4. The biggest risk is between your 401k and your taxable account since your 401k will likely have periodic payroll contributions at least once a month. (I don't know how often you contribute to your rIRA, but I'm assuming it's once or twice per year.) The fact that your taxable account has "different" investments than your 401k makes the chances of triggering a wash sale like that unlikely. With reinvestment of distributions turned off in your rIRA too, you could manually reinvest in your rIRA and taxable at the same time. You really only need to turn on OFF automatic reinvestment of distributions in your rIRA for securities that are the "same" between your rIRA and taxable, which happens to only be VTIAX.
I think powermega meant "OFF" ... Otherwise, I think this point is super important regarding the regular nature of payroll contributions. On that note, you could take the same approach that powermega mentions here regarding those payroll purchases - simply do not automatically contribute to the VTIAX component in the 401K, but rather contribute to it by manually directing money from MM to VTIAX after the cash clears payroll into the MM of the 401k. That pesky little part of Wash sales that mentions "30 days PRIOR to your TLH day" would mean you are always in the first 2 weeks of the 30 day wash sale rule when regularly contributing. This way, at least you could coordinate the taxable/sheltered purchases of VTIAX.

The only other thing I'd mention, not sure if you care or not ... just watch your Taxable account ex-Dividend date if you have a holding time less than 60 days. For example, ppl might want to perform ANOTHER TLH move in the "not so distant future" (maybe to TLH again if there's another sharp down spike in, say, April). Several Vg MF's/ETF's are going ex-Dividend the end of March ...

1) If you TLH today
2) move into a new MF and "buy" the late march dividend of whatever new Vg MF/ETF
3) then you may need to delay a second TLH move in order to achieve the qualifying 60 day holding period of the new MF so that a March dividend remains QDI-eligible (lower tax) - otherwise you run the risk of converting that March dividend into "ordinary" dividends/ST gain/ordinary income.

Good luck!

Rox

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powermega
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Re: Question on Tax Loss Harvesting

Post by powermega » Thu Mar 12, 2015 8:54 pm

Rox, your correction is right. Meant to say "off". Thanks for catching that! (Will edit original post.)
Even a stopped clock is right twice a day.

xrw1
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Re: Question on Tax Loss Harvesting

Post by xrw1 » Fri Mar 13, 2015 12:04 pm

Thank you for all the detailed responses!

Rox, What will happen if I sell my share less than the 60 day holding period? Will that be a total wash or a partial wash sale?


Also, using my example from above if I sold VTSAX for a Vangaurd S&P 500 index for TLH how later TLH the Vanguard S&P500 index for TLH without a wash sale since my 401k invest biweekly into the Fidelity S&P500 index? I guess one way I could do it is divert the funds from the S&P500 index in my 401k to another fund for a while. I just want to hear other peoples suggestions just incase I overlooked something.


Thank you again everyone!

Rox
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Re: Question on Tax Loss Harvesting

Post by Rox » Wed Mar 18, 2015 12:31 pm

So sorry I missed this question in my inbox ... (it got directed to spam) :(
Rox wrote: 1) If you TLH today
2) move into a new MF and "buy" the late march dividend of whatever new Vg MF/ETF
3) then you may need to delay a second TLH move in order to achieve the qualifying 60 day holding period of the new MF so that a March dividend remains QDI-eligible (lower tax) - otherwise you run the risk of converting that March dividend into "ordinary" dividends/ST gain/ordinary income.
xrw1 wrote: What will happen if I sell my share less than the 60 day holding period? Will that be a total wash or a partial wash sale?
The 60 day holding period I mentioned here is to determine QDI-eligible dividends .. it's just a finer point to realize there are 2 different holding periods to take into account when you are TLH'ing. To clarify:

• If you moved $$ into 2 different funds that track the same index (Vg and Fidelity), I'm not sure the IRS would see that as 2 different holdings as they essentially track the same index. If there is a different index involved for the 2 holdings then you'd be ok (i.e. reinvesting the dividends in your 401k Fidelity would not trigger a wash). If I were to receive any dividends in either Vg or Fidelity S&P, I'd consider all re-investments in my calculation of the 30 before/30 day after TLH period of wash sales when TLH'ing the new Vg S&P. Perhaps someone else has a different opinion regarding 2 different fund families tracking the same index and if this is "substantially identical" for TLH/IRS purposes.
• If your new taxable holding were different from the new 401k holding, then you can resume TLH of the taxable $$ anytime as per usual. Say you TLH into Vg S&P and you decide to TLH within a week. You can, provided you sell all your shares, thus avoiding a wash even though that's LESS than the 30 before/30 day after usual wash rule - b/c you have left no "replacement shares".
• After all this, you still have to keep an eye on your ex-dividends if you intend to TLH a second time. If you receive a dividend from Vg S&P and do NOT reinvest it, then you are doing a good job of avoiding a potential wash. HOWEVER, you still received a dividend. And come tax time, your "new" dividend from Vg S&P is only QDI-eligible for reduced taxes (0%,15%, 20%) if you held the underlying security (Vg S&P) for at least 60 days in the window defined by 60 days before/ 60 days after the ex-dividend date (I believe that's the anchor point for that window)

TLDR:
• you have a wash window with a holding period 30 before/30 day after the date of TLH to avoid a wash
• you also have another holding period to consider if you receive dividends defined as 60 days before/ 60 days after the ex-dividend date.
• If you were to receive a dividend in the new Vg S&P and subsequently TLH all shares thus avoiding a wash sale, you might be exiting your position in Vg S&P prior to allowing your dividend becoming QDI-eligible, in which case that dividend becomes an ordinary dividend and treated as ordinary income.

Sorry so late, hope this helps ...

Rox

xrw1
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Re: Question on Tax Loss Harvesting

Post by xrw1 » Wed Mar 18, 2015 1:52 pm

Thank you Rox for the clarification,

It is not late, I was trying to get a better understanding of TLH so if there is a opportunity in the future I would know how to proceed with it.

fmzip
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Re: Question on Tax Loss Harvesting

Post by fmzip » Thu Mar 19, 2015 9:02 am

How does tax loss harvesting work if you are married filing jointly?

Example, if one spouse sells for a loss, can the other spouse buy the same security immediately or are they also obligated to wait the appropriate period as well to harvest the tax deductable loss?

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House Blend
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Re: Question on Tax Loss Harvesting

Post by House Blend » Thu Mar 19, 2015 10:03 am

fmzip wrote:How does tax loss harvesting work if you are married filing jointly?

Example, if one spouse sells for a loss, can the other spouse buy the same security immediately or are they also obligated to wait the appropriate period as well to harvest the tax deductable loss?
Selling in your account at a loss, and repurchasing in your spouse's account within the 30 day window is a wash sale.

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