TLH: Selling of Long-Term Positions

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Call_Me_Op
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TLH: Selling of Long-Term Positions

Post by Call_Me_Op » Wed Jan 27, 2016 6:22 am

This question is for those who tax-lost harvest. Do you avoid selling long-term shares (i.e., shares held for 1 year or longer and thus are subject to reduced tax rate) and if so, I would like to understand your reasoning.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

canga
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Re: TLH: Selling of Long-Term Positions

Post by canga » Wed Jan 27, 2016 6:30 am

Usually TLH implies selling at a loss, so it would not matter whether you are selling long or short term losses.

I do avoid selling long term gains in order to rebalance when I have sold shares at a loss.

Call_Me_Op
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Re: TLH: Selling of Long-Term Positions

Post by Call_Me_Op » Wed Jan 27, 2016 6:44 am

canga wrote: I do avoid selling long term gains in order to rebalance when I have sold shares at a loss.
Hi canga,

Could you elaborate on this? Are you saying that you prefer to sell short-term gains as part of the rebalancing process when you have sold shares at a loss (so that you use the loss to cancel the short-term gains, which saves a lot on taxes)?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

canga
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Re: TLH: Selling of Long-Term Positions

Post by canga » Wed Jan 27, 2016 7:41 am

I should clarify I prefer not to sell anything with a gain unless I can help it. Usually bonds rise when stocks fall, so by shifting bonds to equities I'm forced to sell at a gain. If I can't sell at a loss then I sort my tax lots by "Gain/Loss per Share" and choose lots with the lowest gains.

Short and long term losses must be used first to offset gains of the same type. But if your losses of one type exceed your gains of the same type, then you can apply the excess to the other type. Beyond that, TLH can reduce ordinary income by up to $3,000 per year and carry over to the following year.

If you're in the 25% marginal tax bracket then short term gains are taxed at 25%, long term gains are taxed at 15%, and offsetting ordinary income would save you 25%. It would probably not make sense to trade a short term loss for a long term gain, if a short term loss could be used to offset ordinary income. This would especially be true if your long term capital gains rate were zero.

livesoft
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Re: TLH: Selling of Long-Term Positions

Post by livesoft » Wed Jan 27, 2016 7:52 am

I tax-loss harvest.

I do not avoid selling long-term positions at a loss. There does not even have to be a good reason to not do so because I can buy a similar investment in order to keep my asset allocation the same. One reason I sell losers is to avoid "loss aversion". If one has a boat load of carry-over losses, then that frees one's mind from mental distractions now and in the future. One doesn't "hold on" to something because it would cause a tax hit. In order to get that "boat load", one has to sell losers whether they are long-term or short-term.

I do not avoid selling long-term positions at a gain, but there has to be a very good reason to do so and it should not cause a tax hit. Recently, I have improved the tax efficiency of my portfolio by selling long-term positions with gains. The gains were offset by carryover losses. Examples of this were moving (some, not all) VSS (short-cap foreign with only 49% qualified dividend income) and (some, not all) VBR (US small-cap value with only 70% QDI) from taxable to tax-deferred. The taxable shares of VSS and VBR were purchased back in 2009 and 2010, so they had large unrealized long-term capital gains. I still own these investments, but they are now in my 401(k). One may ask, "Why didn't you buy in your 401(k) to begin with?" and the answer is that my employer 401(k) back in 2009 and 2010 did not have these investment possibilities, but my new solo 401(k) lets me invest in anything I want to.

I avoid paying taxes on my investments. This was not always easy to do, but nowadays I am invested in passively-managed, low-cost, tax-efficient index funds. I strive to avoid non-qualified dividend income in taxable accounts (VSS was replaced with VEA in the taxable account; VBR was replaced with VV; complementary changes were made in my tax-advantaged accounts). I try to keep my taxable income in the 15% marginal income tax bracket. I rebalance in my tax-advantaged accounts while harvesting losses in taxable accounts and letting gains in taxable accounts age to be long-term if I can. I will sometimes realize a short-term gain in a taxable account, but that gain is offset by harvested losses.
Last edited by livesoft on Wed Jan 27, 2016 8:23 am, edited 3 times in total.
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Call_Me_Op
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Re: TLH: Selling of Long-Term Positions

Post by Call_Me_Op » Wed Jan 27, 2016 8:19 am

Hi Livesoft,

Thanks for the detailed description of your TLH approach.

Would you agree that selling FPMAX (index fund, tracks FTSE EM index) and replacing it with IEMG (ETF, tracks MSCI EM index) is OK in that it will not violate the wash-sale rule?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

livesoft
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Re: TLH: Selling of Long-Term Positions

Post by livesoft » Wed Jan 27, 2016 8:22 am

That's OK with me, but I am not the IRS.
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Call_Me_Op
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Re: TLH: Selling of Long-Term Positions

Post by Call_Me_Op » Wed Jan 27, 2016 8:24 am

livesoft wrote:That's OK with me, but I am not the IRS.
I would imagine that if one were to call the IRS and ask that question, they would not receive a straight answer.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

livesoft
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Re: TLH: Selling of Long-Term Positions

Post by livesoft » Wed Jan 27, 2016 8:25 am

The IRS would probably say, "That's OK with us, but we are not livesoft."
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Call_Me_Op
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Re: TLH: Selling of Long-Term Positions

Post by Call_Me_Op » Wed Jan 27, 2016 8:33 am

livesoft wrote:The IRS would probably say, "That's OK with us, but we are not livesoft."
:) Good one. This could get me locked in a high-frequency oscillation.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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