TLH First Time

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

TLH First Time

Post by EMDW » Sun Jan 17, 2016 1:19 pm

Background:
Tax rate over 39%, no substantial identical funds in spouse or my account (taxable and tax advantaged); 2 fund portfolio: Total stock market index admiral (VTSAX) in taxable; total bond (VBTLX) in 401K. Trying to tax loss harvest in the VTSAX since it's down by 83K. Info on vanguard site:

VTSAX: total stock market index admiral
Cost basis method is not established, default is average cost
Inactive: automatic investment, exchange withdrawal, check writing, direct deposit
Active: bank info (dividends deposited into bank account)
Cost basis = unrealized gains/losses = capital gain/loss = SHORT TERM (none in long term) = (-83K)
Dates of buy/dividend received:
BUY: 9-4-15, 9-21-15, 9-29-15, 10-2-15, 1-7-16, 1-8-16, 1-12-16, 1-13-16
Dividends received: 9-24-15, 12-18-15

Steps followed on vanguard site:
Buy and Sell
Exchange vanguard funds
Where is the money coming from: (VTSAX, ER 0.05%)
Choose a cost basis method for your VTSAX
Do you want to use average cost? yes, use average cost. No, I want to use another method ( Specific ID etc)

Questions:
Should I choose the cost basis method since it's just one fund for this first time? or should I select the specific ID now or wait until the next TLH?
Also, is it too early to perform the TLH since I just bought more shares on 1-13-16?
Funds to exchange into: want to approximate the total stock market fund (VTSAX):
100% of VFIAX (vanguard 500 index admiral, ER 0.05%) OR
12% of VSMAX (small cap index admiral, ER 0.09%) + 88 % of VLCAX (large cap index admiral, ER 0.09%)

Got a warning while trying to perform the VLCAX addition "to protect investors, I need to call vanguard first". What does this mean? Overall, are these the correct steps? Thanks for your time in advance.

livesoft
Posts: 69632
Joined: Thu Mar 01, 2007 8:00 pm

Re: TLH First Time

Post by livesoft » Sun Jan 17, 2016 2:22 pm

Choose the cost basis method of Specific Identification. Do this as soon as possible and wait for confirmation from the web site and Vanguard before selling.

Read this thread for more information:
viewtopic.php?t=179414

I would exchange all of it into VLCAX and not worry about a second fund. I did so in 2009.

There are many other possibilities instead of VLCAX. You might search the forum for "TLH VTSAX" (without the quotes).

I think Vanguard wants you to call them since you bought shares 4 times in the past 10 days and now intend to sell all your shares. They are like a Mother and want "What's best for investors?" according to their website.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
dratkinson
Posts: 4772
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: TLH First Time

Post by dratkinson » Sun Jan 17, 2016 4:59 pm

+1 Set Specific Id cost basis method first. That way less chance of Vanguard misunderstanding your true intent.


It is not clear to me, are you TLHing 100% of TSM?

Ensure you understand how "replacement shares" work as 1-7-16, 1-8-16, 1-12-16, 1-13-16 purchases are replacement shares. Recall reading that if you sell the replacement shares at the same time you TLH, then you don't have a wash sale issue. But I don't have an IRS reference to substantiate this, so I could be wrong.

If I did the math right, the replacement shares/wash sale clock, from 12-18-15 dividends (+31 days), expires on 18 Jan (Mon).


Other fund options when selling TSM. Your choice.
--Recall reading that LC value (VIVAX/VVIAX) has similar performance to TSM. Recall checking this with M* growth chart.
--Recall reading that TSM/100% = S&P500/80% + Extended Mkt Index/20%.


The best time to TLH is when it exists.

Exception. If we have booked more loss than we can use in our lifetime, then it's probably not worth it to book more. Why? Our heirs don't get the carryover loss, instead they get a stepped up basis. So for us, harvesting any additional loss only lowers our cost basis, without providing any additional benefit above that already booked.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Re: TLH First Time

Post by EMDW » Sun Jan 17, 2016 5:25 pm

Yes, I was trying to TLH 100% of the VTSAX (everything in this fund until today: move it to another fund). Maybe I've missed something crucial about TLH? I didn't consider/understand the replacement shares in this case. Confirmation from Vanguard about the specific id change will take place on 1/19/16. Perhaps, I am not in a position to TLH at this time? Thanks again.

livesoft
Posts: 69632
Joined: Thu Mar 01, 2007 8:00 pm

Re: TLH First Time

Post by livesoft » Sun Jan 17, 2016 5:27 pm

One certainly cannot TLH today nor tomorrow because the stock market is not open either day.
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Re: TLH First Time

Post by EMDW » Sun Jan 17, 2016 5:34 pm

I meant on 1/19/16 because of the replacement shares?

livesoft
Posts: 69632
Joined: Thu Mar 01, 2007 8:00 pm

Re: TLH First Time

Post by livesoft » Sun Jan 17, 2016 5:39 pm

If you sell all shares, you won't have to worry about a wash sale. As for the December distribution, you did not buy shares with it, so it does not factor in at all. All shares owned on 12/18 when the dividend was paid were purchased on 10/2/2015 or earlier.

dratkinson's sentence about replacement shares is a non sequitur and can be ignored.

We can infer the size of this transaction from the size of the loss you stated. That's why Vanguard wants to talk to you.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
dratkinson
Posts: 4772
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: TLH First Time

Post by dratkinson » Sun Jan 17, 2016 8:05 pm

I missed the fact that dividends were not being reinvested in replacement shares.


In https://www.bogleheads.org/wiki/Wash_sale, it says:
  • How to avoid wash sales

    You can avoid a wash sale by avoiding either criterion: either make sure that you buy any replacement shares at least 31 days before or after the sale, or buy replacement shares that are not substantially identical.
It does not say that selling any replacement shares WITH a TLH is an option to avoid a wash sale. It would certainly ease my mind if it did. I'll suggest it as a Wiki update.

Sari, I'm not saying livesoft is wrong, in fact he's probably correct, I just don't have anything to point to, as an independent confirmation, to substantiate that course of action.

So assuming livesoft is correct, and you sell everything, then Mon is fine.

But if nervous or a partial sale leaves some replacement shares*, then 1-13-16 +31 days should be 2-13-16 (double-check math). (*The term "replacement shares" is only important as it applies to shares purchased within +-30 days of a TLH, as it is only those that can cause a wash sale.)



Wiki suggestion: viewtopic.php?f=9&t=18149&p=2763661#p2763661
Last edited by dratkinson on Sun Jan 17, 2016 8:43 pm, edited 1 time in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

livesoft
Posts: 69632
Joined: Thu Mar 01, 2007 8:00 pm

Re: TLH First Time

Post by livesoft » Sun Jan 17, 2016 8:08 pm

@dra, you might benefit yourself from reading this link with a real-life documentation of something simllar to what the OP is going to do:
viewtopic.php?t=179414
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
dratkinson
Posts: 4772
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: TLH First Time

Post by dratkinson » Sun Jan 17, 2016 8:53 pm

^^^ Thanks, I've subscribed and will follow along.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Re: TLH First Time

Post by EMDW » Tue Jan 19, 2016 8:29 am

On the phone with vanguard. They want to know how long a plan on staying in this new fund, VLCAX, (exchange from total stock market) before they approve the transaction? what?

livesoft
Posts: 69632
Joined: Thu Mar 01, 2007 8:00 pm

Re: TLH First Time

Post by livesoft » Tue Jan 19, 2016 8:31 am

Tell them "Until the next time I have to tax-loss harvest which is hopefully 'Never.'" :)

You might ask them to help you choose a better tax-loss harvest replacement. Since Vanguard has several broad market index funds, ask them which one they would recommend. :twisted:
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Re: TLH First Time

Post by EMDW » Tue Jan 19, 2016 9:15 am

It's already done with vlcax. Thank you.

User avatar
dratkinson
Posts: 4772
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: TLH First Time

Post by dratkinson » Tue Jan 19, 2016 2:04 pm

sari wrote:It's already done with vlcax. Thank you.
And Vanguard didn't flag any wash sale issue? Assuming "No", then data point noted.

Is this knowledge, and the lack of Wiki documentation, part of the Bogleheads' secret handshake?
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Re: TLH First Time

Post by EMDW » Wed Jan 20, 2016 7:04 am

Transaction complete. No wash sale warning.

User avatar
iceport
Posts: 4154
Joined: Sat Apr 07, 2007 4:29 pm

Re: TLH First Time

Post by iceport » Wed Jan 20, 2016 7:27 am

dratkinson wrote:
sari wrote:It's already done with vlcax. Thank you.
And Vanguard didn't flag any wash sale issue? Assuming "No", then data point noted.

Is this knowledge, and the lack of Wiki documentation, part of the Bogleheads' secret handshake?
dratkinson,

No, this is recognized by at least one other expert, Kaye Thomas at Fairmark.com. The following page, in particular, addresses this issue:

Wash Sales and Replacement Stock

The basic concept is that the shares are not "replacement shares" if you sell those shares, also. The whole reason for the wash sale rule is to guard against investors selling to claim a loss while somehow figuring out a way to stay invested. Well, the investor is not staying invested if they sell everything. (Of course, as we all know, the "substantially identical" test for replacement securities offers a loophole large enough to drive a truck through, but that's another question...)
"Discipline matters more than allocation.” ─William Bernstein

User avatar
dratkinson
Posts: 4772
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: TLH First Time

Post by dratkinson » Wed Jan 20, 2016 6:46 pm

iceport wrote:...
No, this is recognized by at least one other expert, Kaye Thomas at Fairmark.com. The following page, in particular, addresses this issue:

Wash Sales and Replacement Stock

The basic concept is that the shares are not "replacement shares" if you sell those shares, also. ...
Thank you for the link. Surely I must have read it before. Didn't know why it didn't sink in before....

Then I came (probably again) to the last paragraph in which the author "feels" the IRS has made erroneous decisions about some of his points. Translation: IRS determined taxpayer's action was not allowed. Which in my mind renders some of his opinions moot. The question is "how much is too far?"


Selling the whole lot (example 1) seem clear enough... as in Sari's case.

As the IRS agrees selling half (example 2) is allowed, then I'll include that in my notes.

His example 4 of using specific ID to sell only the new lot(s), is a twist on what we are taught about selling by specific ID, but it does go along with example 2.


But his example 5, of buying multiple lots within 30 days of a partial sale goes against what we are taught, and blurs the line between buying and (still) owning. His feeling that the IRS's decision against a taxpayer was "erroneous", is moot.

His example 3, separate purchases on one day and selling one, is again his opinion, after noting the IRS could probably decide against a taxpayer. Again, his opinion doesn't ease my mind.


Logically I do understand the difference between BUYING and (still) OWNING replacement shares. But don't want to assume too much with the IRS as I'm older now and trying to reduce my exposure to Pyrrhic victories.

My take away.
--TLH by selling ALL within 30 days of purchase. Acceptable. (This is the documentation I was looking for.)
--TLH by selling partial of larger lot within 30 days of purchase. Acceptable. (New to me, as it blurs line between buying and owning.)
--TLH (all) new lot(s) by specific ID within 30 days of purchase. Acceptable, and a twist on what we are taught.

Not withstanding author's expert status, everything else is his opinion---some of which the IRS has ruled against, and some he says the IRS could rule against---so is too close to chance.

In the past, I must have read this article, noted discrepancies between author's opinions and IRS decisions, and discounted whole article. I was wrong to discount everything.

Thank you and livesoft for being patient enough to get me past my initial reaction. I've updated my notes with above acceptable examples and Fairmark link.



P.S. I notice the market is down again today. Assuming the market continues to drop over the coming weeks, and using the VFWAX/VTIAX pair, I could chase the market to the bottom by TLHing every week/day by selling all, and never have a wash sale issue? Excellent!

Wait. No. Problem. Technically correct, but the VFTP limits me to 30-days on the round trip. (Exceptions to VFTP noted.)
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

User avatar
iceport
Posts: 4154
Joined: Sat Apr 07, 2007 4:29 pm

Re: TLH First Time

Post by iceport » Wed Jan 20, 2016 7:26 pm

Hi dratkinson,

This stuff is far from obvious. I'm glad if you found the reference helpful. I've always been able to understand K. Thomas' explanations far better than the IRS publications.

You might be interested to read Mr. Thomas' initial reactions to the new (2011/2012?) cost basis reporting rules. The replacement shares concept is one of two (the other being the holding period adjustment) that he singled out as particularly problematic. After reading the article linked below a few years ago, I made a mental note not to put much trust in a mutual fund company's cost basis accounting algorithms.

Coming Clean on Wash Sales
When the Treasury was developing the cost basis reporting rules I submitted comments explaining the need for guidance in this area. Others commentators said brokers shouldn’t have to apply the wash sale rule at all. The Treasury rejected both suggestions, and the result is that brokers are required to apply these rules, and are potentially subject to penalties for failing to apply them correctly, even though we haven’t been told what is the correct way to apply them. In consulting with software developers I’ve had to tell them there are no clear answers to these questions and that we have to select a workable and defensible interpretation. Because of these ambiguities, investors have no way to be certain the tax reports they receive from brokers are correct, even if the broker has implemented the rules as thoughtfully and accurately as possible.
A couple more cautionary articles from Fairmark.com are here:

Gaps in Cost Basis Reporting

The Mindbending World of Wash Sale Calculations
"Discipline matters more than allocation.” ─William Bernstein

User avatar
iceport
Posts: 4154
Joined: Sat Apr 07, 2007 4:29 pm

Re: TLH First Time

Post by iceport » Wed Jan 20, 2016 7:29 pm

dratkinson wrote:P.S. I notice the market is down again today. Assuming the market continues to drop over the coming weeks, and using the VFWAX/VTIAX pair, I could chase the market to the bottom by TLHing every week/day by selling all, and never have a wash sale issue? Excellent!

Wait. No. Problem. Technically correct, but the VFTP limits me to 30-days on the round trip. (Exceptions to VFTP noted.)
Not technically correct, as the wash sale rule also prevents a round trip TLH within 30 days!
"Discipline matters more than allocation.” ─William Bernstein

livesoft
Posts: 69632
Joined: Thu Mar 01, 2007 8:00 pm

Re: TLH First Time

Post by livesoft » Wed Jan 20, 2016 8:01 pm

Here's a simple way I think about the wash sale rule: If there are no shares that I can pin the disallowed loss on (in any account), then there is no wash sale.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
dratkinson
Posts: 4772
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: TLH First Time

Post by dratkinson » Wed Jan 20, 2016 8:20 pm

iceport wrote:
dratkinson wrote:P.S. I notice the market is down again today. Assuming the market continues to drop over the coming weeks, and using the VFWAX/VTIAX pair, I could chase the market to the bottom by TLHing every week/day by selling all, and never have a wash sale issue? Excellent!

Wait. No. Problem. Technically correct, but the VFTP limits me to 30-days on the round trip. (Exceptions to VFTP noted.)
Not technically correct, as the wash sale rule also prevents a round trip TLH within 30 days!
lol. Yea... was so fixated on the before-TLH allowed processes, that I forgot the after-TLH 30-day clock. But I remembered when I received your quick reply notification. (What did I forget? Oh! That.) So in this case, Vanguard would protect me from myself. Thank you Vanguard. :D

This is why I try to use a checklist---to avoid known gotcha---for all transactions. And concede I may have committed an error on the side of caution. Now it seems I should use same checklist to post.



@livesoft. Your phrasing ("If there are no shares that I can pin the disallowed loss on...") is a little different than I've seen before, and I would like to think about it. But not today, as I've beat back about as much ignorance as I can handle for one day.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

User avatar
dratkinson
Posts: 4772
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: TLH First Time

Post by dratkinson » Thu Jan 21, 2016 8:45 pm

livesoft wrote:Here's a simple way I think about the wash sale rule: If there are no shares that I can pin the disallowed loss on (in any account), then there is no wash sale.
I've thought about it. May I suggest an editorial change to encompass more of the Fairmark examples?

Suggested change: "If there is no other lot that I can pin the disallowed loss on (in any account), then there is no wash sale."

Why? Because previously I would have said the remaining shares in the partial-lot TLH (Fairmark example #2) constituted a wash sale. Why? Because they were bought within 30 days of the TLH. I now know that not to be the case.

I'm thinking "no other lot" gets me closer to the Fairmark intent, and reminds me a wash sale does not apply to the remaining shares of the partial-lot TLH.

Do you agree with the change? I'd like to add your phrase to my checklist as a quick TLH thumbnail guide.





"Thanks" to placeholder who helped beat back my ignorance in PM.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

livesoft
Posts: 69632
Joined: Thu Mar 01, 2007 8:00 pm

Re: TLH First Time

Post by livesoft » Thu Jan 21, 2016 9:52 pm

I had to go read the Fairmark example 2 to see what you were driving at. I don't have an opinion of whether "shares" should be changed to "lot" or other variation "shares in another lot". Do whatever you think will help folks understand what is going on. Many will not read the Fairmark articles nor will they read the entire Wiki article either, so I would not expect there will ever be a complete satisfactory write-up that no one will make mistakes with.
Wiki This signature message sponsored by sscritic: Learn to fish.

stupidkid
Posts: 169
Joined: Wed Oct 12, 2011 7:11 pm

Re: TLH First Time

Post by stupidkid » Fri Jan 22, 2016 2:34 pm

I'd like to add my own question to this thread, since this is technically maybe my second TLH as I did one at the end of last year and have already executed a sale earlier this week. I get the principle of selling shares at a loss, doing "something" with the money; some say transfer to a like fund, some say leave in cash - I TLH'd some international shares (VWO, VSS) and put the proceeds into total stock (VTI), figuring I'm ok with more total stock allocation and they're correlated enough that I can swap back into my international funds after a month and probably be on par with any price changes.

My questions. When I sell the VTI after 30 days to (re)purchase VWO & VSS, should I sell my recently purchased holdings or sell older shares with LTCG, gains which will be negated by the losses incurred?

Related - is the principal benefit of TLH (in any given year) to reduce your tax bill, $3k of income which would be taxed at the highest rate; or is it better to tax gain harvest and reset shares which have appreciated to a higher cost basis? Assuming you don't have gains to offset for some other reason, e.g. you needed to sell shares for some purpose.

As I think about it, my LTCGs will be taxed at a more favorable rate than my ordinary income (and possibly at 0% some time in the future if gains are all I have for income), so I should at a minimum leave enough capital loss to offset $3k of income. But if I have more loss than that, do I bank it for future years, or tax gain harvest and offset the gains with the remaining loss?

Some reference data, I'm mid-30s aways from retirement and my effective tax rate in 2014 was 25%. 2015 might be a little higher.

User avatar
grabiner
Advisory Board
Posts: 25662
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: TLH First Time

Post by grabiner » Fri Jan 22, 2016 4:49 pm

stupidkid wrote:My questions. When I sell the VTI after 30 days to (re)purchase VWO & VSS, should I sell my recently purchased holdings or sell older shares with LTCG, gains which will be negated by the losses incurred?

Related - is the principal benefit of TLH (in any given year) to reduce your tax bill, $3k of income which would be taxed at the highest rate; or is it better to tax gain harvest and reset shares which have appreciated to a higher cost basis? Assuming you don't have gains to offset for some other reason, e.g. you needed to sell shares for some purpose.
The principal benefit is to reduce your tax bill, either by offsetting $3000 of ordinary income, or by offsetting capital gains which you need to take for some other reason (to rebalance, or to spend the money). There is no need to sell stock for a gain just to use up the loss, since the unused loss will carry over to the next year and offset another $3000 of ordinary income.

One possible exception applies if you pay state tax. Some states, such as NJ and PA, do not allow capital loss carryovers, and do not allow deductions of capital losses against ordinary income. If you live in one of those states, and have a carryover which is large enough that it will eventually offset gains, you can take the gains in the same year as the loss. (This might apply if you still have unused carryovers from 2008-2009, so that you know that offsetting your 2016 losses with a gain won't affect your federal tax for years.)
Wiki David Grabiner

stupidkid
Posts: 169
Joined: Wed Oct 12, 2011 7:11 pm

Re: TLH First Time

Post by stupidkid » Fri Jan 22, 2016 5:07 pm

Thanks, that's helpful. Given this, it seems best to sell the shares with the least amount of gain in order to re-invest in the original asset.

User avatar
dratkinson
Posts: 4772
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: TLH First Time

Post by dratkinson » Fri Jan 22, 2016 6:27 pm

stupidkid wrote:I'd like to add my own question to this thread, since this is technically maybe my second TLH as I did one at the end of last year and have already executed a sale earlier this week. I get the principle of selling shares at a loss, doing "something" with the money; some say transfer to a like fund, some say leave in cash - I TLH'd some international shares (VWO, VSS) and put the proceeds into total stock (VTI), figuring I'm ok with more total stock allocation and they're correlated enough that I can swap back into my international funds after a month and probably be on par with any price changes.

My questions. When I sell the VTI after 30 days to (re)purchase VWO & VSS, should I sell my recently purchased holdings or sell older shares with LTCG, gains which will be negated by the losses incurred?

Related - is the principal benefit of TLH (in any given year) to reduce your tax bill, $3k of income which would be taxed at the highest rate; or is it better to tax gain harvest and reset shares which have appreciated to a higher cost basis? Assuming you don't have gains to offset for some other reason, e.g. you needed to sell shares for some purpose.

As I think about it, my LTCGs will be taxed at a more favorable rate than my ordinary income (and possibly at 0% some time in the future if gains are all I have for income), so I should at a minimum leave enough capital loss to offset $3k of income. But if I have more loss than that, do I bank it for future years, or tax gain harvest and offset the gains with the remaining loss?

Some reference data, I'm mid-30s aways from retirement and my effective tax rate in 2014 was 25%. 2015 might be a little higher.
The short answer. The purpose of taking a loss is to reduce our taxes. The question then becomes, "What's the best way to do it?"


The long answer.

A loss helps most when it offsets ordinary income; it is then that our highest marginal tax rate applies (is offset): greater tax benefit received. If a TLH/carryover loss offsets LTCG, then our lower tax rate applies (is offset): less tax benefit received.

Because of above, the general guideline is: don't harvest gains with TLH or carryover loss.


But advice should be tempered with knowledge of IRS netting rules. Why? Because in the year received, a large capital loss does offset a large capital gain dollar-for-dollar. It is only in the following years that the $3K carryover loss limit applies.

IRS netting rules for ST and LT capital gains. (No longer have link to source. Could closely inspect IRS Sch D.)
1. Net total short-term gains and losses.
2. Net total long-term gains and losses.
3. Net any remaining short-term losses against remaining long-term gains.
If result is negative, can use $3000 to offset current year income.
Any excess loss is carried forward as LT loss.

Note. Our investments pay some LTCG annually, and this offsets any capital loss (TLH or carryover) before it gets to our ordinary income. So harvesting an additional gain could result in a total gain that would consume your total loss before it can offset your ordinary income.

If you expect to be in 15% bracket in retirement (and tax law doesn't change: LTCG taxed at 0%), then no need to raise your cost basis today. As harvesting LTCG today in 25% bracket only costs you taxes that you could have avoided in retirement in 15% bracket.

Note: Uncle sugar's LTCG 15%-bracket favorable tax treatment is not honored by his cousins at state... so you'll pay state taxes on LTCG---now or in retirement.

Another interesting concept: Income stacking---how income and deductions are applied.
See: http://thefinancebuff.com/fiscal-cliff- ... gains.html
See: https://www.kitces.com/blog/understandi ... -in-basis/


So the answer to your question---which is better: harvest loss or gain---is that it probably depends: upon the relative size of each, and your tax brackets now and in retirement.


Idea. If you need it. A way to increase your ordinary income: Convert to a Roth IRA, as conversion is taxed as ordinary income, not LTCG. This could be a good idea: pay smaller total tax now at 25% and shelter 30yrs of growth. Or it could be a bad idea: pay taxes now at 25% when you could convert in retirement and pay taxes at 15%. Answer probably depends upon "growth" component and compounding time horizon. If using only bonds in your IRA, then low-growth is sheltered, meaning you'd pay more in taxes now than you'd expect to shelter in long-term growth.


From above (IRS income stacking, loss netting rules), add your situation (booked carryover loss, potential TLH, harvest LTCG, tax-sheltered growth potential on IRA conversion, tax brackets now and in retirement, ...), and play with income and tax scenarios. That's the best I can suggest.

But the general rule is: don't harvest LTCG with a carryover capital loss.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

User avatar
grabiner
Advisory Board
Posts: 25662
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: TLH First Time

Post by grabiner » Fri Jan 22, 2016 6:41 pm

dratkinson wrote:IRS netting rules for ST and LT capital gains. (No longer have link to source. Could closely inspect IRS Sch D.)
1. Net total short-term gains and losses.
2. Net total long-term gains and losses.
3. Net any remaining short-term losses against remaining long-term gains.
If result is negative, can use $3000 to offset current year income.
Any excess loss is carried forward as LT loss.
You can net either way.

1. Net short-term gains and losses.
2. Net long-term gains and losses.
3. Net any remaining short-term gains against long-term losses, or vice versa.

If the result is positive, pay tax at short-term or long-term rates depending on the type of gain.
If the result is negative, can use $3000 to offset current-year income (short-term loss used first).
Any excess loss is carried over and remains short-term or long-term.
Wiki David Grabiner

User avatar
dratkinson
Posts: 4772
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: TLH First Time

Post by dratkinson » Fri Jan 22, 2016 6:59 pm

^^^ Thanks. Notes updated.

Your explanation is the most complete I've read and answers my remaining questions.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Re: TLH First Time

Post by EMDW » Fri Mar 04, 2016 12:15 am

OP here. Sold VTSAX on 1-19-16 (harvested 85K) and bought VLCAX on same day. Bought more shares of VLCAX on 1-20-16 and 2-8-16. Distribution for VLCAX will occur this month. Should I buy back VTSAX now before distribution for VLCAX? Or should I stay with VCLAX until it turns a loss (which may never happen)? Both VTSAX and VLCAX are up in value. Will I loose some of the harvested gain (85K) if I buy back? Thanks in advance.

User avatar
dratkinson
Posts: 4772
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: TLH First Time

Post by dratkinson » Fri Mar 04, 2016 5:45 am

Sold VTSAX on 19 Jan 16 and bought VLACX, can buy back in:

19-01-16
+31 days
50-01-16, invalid Jan date
-31+01, minus one month (Jan), plus one month
19-02-16, >30-day wash sale period after TLH satisfied.

+31 days (62 days total)
50-02-16, invalid Feb date
-29+01, minus one month (Feb), plus one month
21-03-16, >61-days QDI holding period on VLACX underlying shares satisfied.


Assuming VLACX has a STCG and it remains, your options appear to be.
  • 1. Sell before Mar distribution. You will report a STCG and it will reduce your TLH.

    2*. Sell after distribution and before 21 Mar 16. Will lose QDI tax benefit if underlying shares sold before 21 Mar 16; and diminished STCG (because NAV drops after distribution) will reduce your TLH.

    3*. Sell after distribution and on/after 21 Mar 16. Will keep QDI favorable tax treatment, but diminished STCG (because NAV drops after distribution) will reduce your TLH.

    4*. Continue to hold VLACX. Will not realize STCG and current TLH will not be diminished. This suggests putting new money into VTSAX or VLACX. Your choice. When do you sell VLACX? If you receive LTCG and TLH, can sell after >half year holding period on underlying shares, otherwise TLH's STCL converted dollar-for-LTCG-dollar into LTCL. I don't know the holding period requirement if we receive LTCG and sell for a profit.
*Notes.
--Vanguard does not tell us the flavors (dividend, STCG, LTCG) until after distributions received.
--We will not know about QDI until next January.


There is also a chance I may have overlooked something. Example: Distributions come in four flavors: ordinary dividends, QDI, STCG, and LTCG. I don't know if there is a holding period requirement on underlying VLACX shares if a LTCG distribution is received (as there is on QDI) and we sell for a profit.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

livesoft
Posts: 69632
Joined: Thu Mar 01, 2007 8:00 pm

Re: TLH First Time

Post by livesoft » Fri Mar 04, 2016 7:18 am

sari wrote:OP here. Sold VTSAX on 1-19-16 (harvested 85K) and bought VLCAX on same day. Bought more shares of VLCAX on 1-20-16 and 2-8-16. Distribution for VLCAX will occur this month. Should I buy back VTSAX now before distribution for VLCAX? Or should I stay with VCLAX until it turns a loss (which may never happen)? Both VTSAX and VLCAX are up in value. Will I loose some of the harvested gain (85K) if I buy back? Thanks in advance.
I'm confused by what you wrote. I would not create a realized short-term capital gain of $85K. No way, no how.

Th VLCAX distribution is nothing to be concerned about. VTSAX will have one, too.

If you have a gain of $85K, I would suggest holding that VLCAX forever.
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Re: TLH First Time

Post by EMDW » Fri Mar 04, 2016 7:35 am

Thank you both. Needed to understand the process of what to do after TLH and now I do.

User avatar
dratkinson
Posts: 4772
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: TLH First Time

Post by dratkinson » Fri Mar 04, 2016 6:04 pm

To be clear... you harvested an $85K tax loss, not a capital gain? That was the purpose of this topic, right? Confusion comes from "harvested gain (85K)". With a TLH, it avoids confusion to say "harvested loss (85K)".
sari wrote:OP here. Sold VTSAX on 1-19-16 (harvested 85K capital loss, not capital gain?) and bought VLCAX on same day. Bought more shares of VLCAX on 1-20-16 and 2-8-16. Distribution for VLCAX will occur this month. Should I buy back VTSAX now before distribution for VLCAX? Or should I stay with VCLAX until it turns a loss (which may never happen)? Both VTSAX and VLCAX are up in value. Will I loose some of the harvested gain (85K) if I buy back? Thanks in advance.
Found a mistake. Above I calculated VLACX QDI holding period on underlying shares from 19 Jan 16 (*TLH?) date. Should have used date of last (not first) purchased VLACX shares: 8 Feb 16. (Late, fixated, head up and locked, usual outcome.) It's left as a student exercise for you to **recompute correct holding QDI period (62 days after 8 Feb 16) and insert correct date into above advice.

*If you harvested a gain (sold VTSAX for a profit), then wash sale holding period does not apply to sales at a profit and all I said above about avoiding a wash sale is moot. The VLACX QDI holding period issue still applies.

**Or you could google "date addition subtraction" (no quotes) and use one of the many internet date calculators, like this one: http://www.timeanddate.com/date/dateadd.html . But where's the fun in that?
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Post Reply