Is there such a thing as tax loss harvesting if you are a boglehead?

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lightnoise
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Is there such a thing as tax loss harvesting if you are a boglehead?

Post by lightnoise » Sun Mar 12, 2017 8:29 am

Here's where I am confused when it comes to the idea of tax-loss harvesting. I understand the concept and the purpose of tax-loss harvesting but what I don't follow is that if you are a strict boglehead and only invest in passive index funds and rebalance when necessary and stick to your asset allocation through thick or thin, when would the opportunity to tax-loss harvest arise?

If the idea is to sell high and buy low (i.e. rebalance when you cross thresholds per your plan), does tax loss harvesting come into play?

If the idea is to stick to your asset allocation in down market conditions (i.e. don't panic sell), how does tax loss harvesting come into play?

Sorry if I am not getting this. I would like to understand it from people who know a whole lot more than I do?

Thanks

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Pranav
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by Pranav » Sun Mar 12, 2017 8:38 am

When Tax Loss Harvesting, people typically exchange similar funds to keep the same asset allocation. For example, sell Total Stock Market Index Fund and buy S&P 500 Index Fund. For more information, check out the Bogleheads Wiki page on Tax-Loss-Harvesting.
https://www.bogleheads.org/wiki

livesoft
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by livesoft » Sun Mar 12, 2017 8:44 am

Let me give another example for you to study:

Exchange VFWAX at a loss and get VTIAX.

What does that do for your asset allocation?
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lightnoise
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by lightnoise » Sun Mar 12, 2017 9:06 am

Thank you livesoft. I take back what I said...guess I didn't really understand the concept.

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Svensk Anga
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by Svensk Anga » Sun Mar 12, 2017 9:15 am

I think you might also be missing the opportunity to use "specific identification" of shares to sell when tax-loss harvesting. Likely you will not have the opportunity to tax-loss harvest shares you bought 20 years ago, but maybe the ones you bought last month or last year will show a loss during a short term market gyration. So you keep the long-held shares showing gains and sell the newer shares showing losses. You have to specify to your broker which shares to sell. Your sales proceeds can immediately go into something similar to maintain your AA, as long as it is not "substantially identical".
Last edited by Svensk Anga on Sun Mar 12, 2017 9:32 am, edited 1 time in total.

livesoft
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by livesoft » Sun Mar 12, 2017 9:31 am

lightnoise wrote:Thank you livesoft. I take back what I said...guess I didn't really understand the concept.
Are you OK with it now? I can't tell from your response.
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AAA
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by AAA » Sun Mar 12, 2017 9:46 am

A related question - You get a tax break when you sell at a loss, but if what you exchanged into eventually goes up, don't you then have a higher tax bill if/when it is sold, and does that then in a sense negate the initial tax break?

MathWizard
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by MathWizard » Sun Mar 12, 2017 9:49 am

I've never had a chance to TLH.

All my money goes into tax advantaged accounts, rather than taxable, which I think is preferable.

I would do so if I could.

livesoft
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by livesoft » Sun Mar 12, 2017 9:51 am

AAA wrote:A related question - You get a tax break when you sell at a loss, but if what you exchanged into eventually goes up, don't you then have a higher tax bill if/when it is sold, and does that then in a sense negate the initial tax break?
That is possible, but I will just tell you what happened to us: We went from 33% marginal income tax bracket to the 15% marginal income tax bracket when we stopped working so much. If you understand tax laws, then you know that means we went from paying capital gains taxes to the 0% tax rate for long-term capital gains. That is, our equities went up, but the gains are no longer taxed.

There are other ways to avoid taxes on capital gains, too. They are all in the tax laws that are perhaps obscured by using tax software.
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by cheese_breath » Sun Mar 12, 2017 9:52 am

AAA wrote:A related question - You get a tax break when you sell at a loss, but if what you exchanged into eventually goes up, don't you then have a higher tax bill if/when it is sold, and does that then in a sense negate the initial tax break?
That may depend on your tax bracket. Considering federal taxes only, if you're in the 15% or lower bracket you get a tax break when you harvest, but you'll pay 0% tax on the gain when it goes back up.
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by mhalley » Sun Mar 12, 2017 9:56 am

That is true. Kitces had a a good article on this, that basically said you are just postponing the taxes, not negating them. He does conclude that there is a benefit. Plus, if you die before depleting your portfolio,the benefit remains.

"...for many investors, the benefit of tax loss harvesting is overestimated, as harvesting a loss generates current tax savings, but also reduces the cost basis of the investment, triggering a potential gain in the future that may offset most or all of the loss harvesting benefit!"

"Nonetheless, even if a harvested loss creates a future gain, there is still an opportunity for tax deferral in the meantime, which can create a modest but non-trivial economic benefit for tax loss harvesting. The benefits are further amplified – sometimes greatly so – if there is a potential that gains in the future will be taxed at a lower rate than losses harvested today, with the caveat that if brackets go the other direction, tax loss harvesting not only loses its positive value but can actually be wealth destructive!"

"To the extent that tax brackets changes are anticipated favorable, though – or at least, that rates will hold steady – some benefit to tax loss harvesting remains, and can be maximized with portfolios that hold a wide range of diversified positions (creating more loss harvesting opportunities), have ongoing contributions (again creating more loss harvesting opportunities), and are checked frequently for losses to harvest (as only trying to harvest losses in December can miss out on even greater intra-year loss harvesting opportunities!). And for those who are not at risk for adverse tax bracket changes, the tax loss harvesting opportunity is especially appealing in today’s environment, with transaction costs (including trading fees and bid/ask spreads) as low as they’ve ever been, and more opportunities than ever to own investment alternatives that minimize tracking error while navigating the wash sale rules!"
"...while tax loss harvesting doesn’t necessarily produce any net tax savings, it is the equivalent of getting an interest-free loan from the Federal government to use for a (potentially long) period of tax deferral."

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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by David Scubadiver » Sun Mar 12, 2017 9:58 am

AAA wrote:A related question - You get a tax break when you sell at a loss, but if what you exchanged into eventually goes up, don't you then have a higher tax bill if/when it is sold, and does that then in a sense negate the initial tax break?
Yes, in a sense. But, saving income tax on $3000 today and paying capital gains tax on $3000 tomorrow is better than saving nothing today. :)

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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by Alto Astral » Sun Mar 12, 2017 10:07 am

cheese_breath wrote:
AAA wrote:A related question - You get a tax break when you sell at a loss, but if what you exchanged into eventually goes up, don't you then have a higher tax bill if/when it is sold, and does that then in a sense negate the initial tax break?
That may depend on your tax bracket. Considering federal taxes only, if you're in the 15% or lower bracket you get a tax break when you harvest, but you'll pay 0% tax on the gain when it goes back up.
Ahhh, I see it now. Light bulb moment for me!

AlwaysaQ
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by AlwaysaQ » Sun Mar 12, 2017 10:37 am

Also capital losses affect the MAGI. I took some losses early in 2016 and stayed below the next Medicare tier.

KlangFool
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by KlangFool » Sun Mar 12, 2017 10:37 am

Folks,

Please note that in many cases, there is a tax benefit even if your tax bracket does not change. Let's assume that you are in 25% marginal tax rate.

1) When you TLH and generate $3,000 deduction against your income, you are saving 25% tax.

2) If you wait 2 years to sell, at 25% marginal tax rate, you generate an additional $3,000 worth of long-term capital gain. But, at 25% marginal tax rate, your long-term capital gain is taxed at 15%. You have save 25% -15% = 10% tax in the process.

You had shifted $3,000 into income tax deduction and long-term capital gain. You save 10% tax in the process with the same tax bracket.

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CABob
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by CABob » Sun Mar 12, 2017 11:02 am

In order to TLH one must have an investment that has a current market value of less that what was paid for that investment. Secondly, the investment must be in a taxable account. If one has been investing for a while it is possible and perhaps likely that they have no candidates for TLH or any that they do have are of a magnitude that TLH is just not practical.
Bob

livesoft
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by livesoft » Sun Mar 12, 2017 11:11 am

CABob wrote:In order to TLH one must have an investment that has a current market value of less that what was paid for that investment. Secondly, the investment must be in a taxable account. If one has been investing for a while it is possible and perhaps likely that they have no candidates for TLH or any that they do have are of a magnitude that TLH is just not practical.
That is so true. Furthermore, I would suggest that one tax-loss harvests almost every possible loss in a taxable account while it is still short-term and/or before each year-end, so that each new year starts with no losses in one's taxable account.
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retiredjg
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by retiredjg » Sun Mar 12, 2017 11:16 am

lightnoise, even for people who don't want to tax loss harvest regularly, when the market takes a big dive like 2001 and 2008, a person might be able to "harvest" thousands of dollars worth of losses just by exchanging one fund into a similar fund. If you have a chance to make the "round trip", you can bank thousands more dollars worth of losses and be back to your original fund.

For years after all the mess is over, you can take $3,000 of "carry over losses" off your taxable income each year until all your losses are gone. This could last for decades.

TLH is a powerful tool for someone who has a large taxable account and who is willing to be meticulous enough to watch for TLH opportunities and avoid wash sales (not illegal, but something of an aggravation).

Nice as it is, though, TLH is not a required activity for a person to be a very good investor. It's some very nice icing on the cake. :happy

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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by KlangFool » Sun Mar 12, 2017 11:21 am

CABob wrote:In order to TLH one must have an investment that has a current market value of less that what was paid for that investment. Secondly, the investment must be in a taxable account. If one has been investing for a while it is possible and perhaps likely that they have no candidates for TLH or any that they do have are of a magnitude that TLH is just not practical.
CABob,

1) For some of us, we run out of tax-advantaged space for our savings. So, we have to invest in the taxable account.

2) We invest regularly in the taxable account. So, we have many individual lots of our mutual funds and ETF.

3) Some of our investment like the small cap value funds are highly volatile. Hence, many TLH opportunities.

4) Our portfolio is big enough that the magnitude of TLH is big enough that we only need to do it once every few years.

Your point is valid. But, for some of us, it is not a problem.

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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by 2015 » Sun Mar 12, 2017 1:36 pm

livesoft wrote:
CABob wrote:In order to TLH one must have an investment that has a current market value of less that what was paid for that investment. Secondly, the investment must be in a taxable account. If one has been investing for a while it is possible and perhaps likely that they have no candidates for TLH or any that they do have are of a magnitude that TLH is just not practical.
That is so true. Furthermore, I would suggest that one tax-loss harvests almost every possible loss in a taxable account while it is still short-term and/or before each year-end, so that each new year starts with no losses in one's taxable account.
Livesoft, I have bookmarked many of your helpful TLH posts in a 2008 thread on the subject, the TLH for Dummies thread, to include your very helpful algorithm in that post. You have explained the reasoning behind your TLH of ST losses before year end suggestion elsewhere but for the life of me I can't find it. Can you please reiterate the advantage of starting the new year with no losses in the taxable account?

Thank you!

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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by livesoft » Sun Mar 12, 2017 1:52 pm

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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by Vanguard Fan 1367 » Sun Mar 12, 2017 1:54 pm

I consider myself a Boglehead. I love the low fee index investing. Many on here wouldn't be interested in something like BLV, a long term bond index ETF. I bought some in the fall and the price went down. So I sold it and bought VCLT, a Long Term Corporate Bond ETF, and generated a tax loss for 2016.

Bonds seem to have lost their magic but to be a Boglehead you need some sort of percentage and my 80 stock 20 Bond seems to be working quite well, even if I am taking a bath in bonds lately.

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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by goingup » Sun Mar 12, 2017 3:03 pm

I don't love TLHing. I have referred to it as a mere footnote in investing and pretty much think it's a giant distraction in wealth-building.

The benefits are real, however, and as long you swap into a similar fund your AA doesn't change. Obviously the losses are useful when paired against gains, or deducted from income.

I tend to think there are lots of folks who panic sell, go to cash, then euphemistically call it Tax Loss Harvesting. If you do that then you're just selling low. :|

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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by The Wizard » Sun Mar 12, 2017 4:05 pm

goingup wrote: ...I tend to think there are lots of folks who panic sell, go to cash, then euphemistically call it Tax Loss Harvesting. If you do that then you're just selling low. :|
Indeed.
Livesoft's point about selling your losers and avoiding the loss aversion concept is, I think, significant...
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by triceratop » Sun Mar 12, 2017 5:25 pm

cookymonster wrote:I have about $63,000 in capital loss carryovers at this point, and I started investing AFTER the last bear market in 2009. If the capital loss claim limit stays at $3,000, I won't finish claiming these until I'm in my mid-50s. So I wonder at what point am I just going to be generating capital loss carryovers that I'm never going to use and simply just paying a bunch of bid/ask and trading fees?

I've also realized that some funds/ETFs don't really have satisfactory TLH partners. SCHC is one (don't say VSS, it is very tax inefficient for people in high tax brackets). RZV is another.
What is the tax efficiency of SCHC? Do you have the foreign tax information (I notice a number of posters claim to have this information but I have not seen a link to such information; the annual report info is...incomplete and possibly not correct?) for SCHC? Where did you obtain this?

Anyway, My Calculations show that for VSS vs. VXUS for a high-tax investor in the 33%/15%/9% fed/ltcg&qdi/state brackets the cost is 0.12% for VSS over the all-cap VXUS. How does that compare to your calculations for SCHC vs. SCHF?
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cookymonster
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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by cookymonster » Sun Mar 12, 2017 6:00 pm

triceratop wrote:
cookymonster wrote:I have about $63,000 in capital loss carryovers at this point, and I started investing AFTER the last bear market in 2009. If the capital loss claim limit stays at $3,000, I won't finish claiming these until I'm in my mid-50s. So I wonder at what point am I just going to be generating capital loss carryovers that I'm never going to use and simply just paying a bunch of bid/ask and trading fees?

I've also realized that some funds/ETFs don't really have satisfactory TLH partners. SCHC is one (don't say VSS, it is very tax inefficient for people in high tax brackets). RZV is another.
What is the tax efficiency of SCHC? Do you have the foreign tax information (I notice a number of posters claim to have this information but I have not seen a link to such information; the annual report info is...incomplete and possibly not correct?) for SCHC? Where did you obtain this?

Anyway, My Calculations show that for VSS vs. VXUS for a high-tax investor in the 33%/15%/9% fed/ltcg&qdi/state brackets the cost is 0.12% for VSS over the all-cap VXUS. How does that compare to your calculations for SCHC vs. SCHF?
http://hosted.rightprospectus.com/docum ... tf_ann.pdf
See page 49.
Divide the total Foreign tax paid by the total assets (on page 23) then multiply by $10,000. I get $18.98

What kills VSS is the QDI ratio of 0.49. SCHC is 0.72. SCHC also has fewer dividends in general. In my bracket (33% fed, 18.8% LTCG, 5% State), total cost for SCHC is 0.47% (tax efficiency of 0.34%), it's a bargain.

SCHF is also the most tax-efficient fund in its class in my tax bracket.

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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by IowaFarmBoy » Sun Mar 12, 2017 6:09 pm

I don't think anyone has mentioned this but if you are going to do charitable contributions anyway, you can avoid gains on appreciated securities by donating them. The value of this will depend on the relative size of your taxable account and the donations you plan to make.

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Re: Is there such a thing as tax loss harvesting if you are a boglehead?

Post by triceratop » Sun Mar 12, 2017 7:05 pm

cookymonster wrote:
triceratop wrote:
cookymonster wrote:I have about $63,000 in capital loss carryovers at this point, and I started investing AFTER the last bear market in 2009. If the capital loss claim limit stays at $3,000, I won't finish claiming these until I'm in my mid-50s. So I wonder at what point am I just going to be generating capital loss carryovers that I'm never going to use and simply just paying a bunch of bid/ask and trading fees?

I've also realized that some funds/ETFs don't really have satisfactory TLH partners. SCHC is one (don't say VSS, it is very tax inefficient for people in high tax brackets). RZV is another.
What is the tax efficiency of SCHC? Do you have the foreign tax information (I notice a number of posters claim to have this information but I have not seen a link to such information; the annual report info is...incomplete and possibly not correct?) for SCHC? Where did you obtain this?

Anyway, My Calculations show that for VSS vs. VXUS for a high-tax investor in the 33%/15%/9% fed/ltcg&qdi/state brackets the cost is 0.12% for VSS over the all-cap VXUS. How does that compare to your calculations for SCHC vs. SCHF?
http://hosted.rightprospectus.com/docum ... tf_ann.pdf
See page 49.
Divide the total Foreign tax paid by the total assets (on page 23) then multiply by $10,000. I get $18.98

What kills VSS is the QDI ratio of 0.49. SCHC is 0.72. SCHC also has fewer dividends in general. In my bracket (33% fed, 18.8% LTCG, 5% State), total cost for SCHC is 0.47% (tax efficiency of 0.34%), it's a bargain.

SCHF is also the most tax-efficient fund in its class in my tax bracket.

Thanks. The annual report numbers are useful and I'm aware of them, but annoying to me in that they have a different fiscal year. However, I am sure that does not matter much.

There's a bit of a question about comparing apples to oranges here because SCHC is developed markets only while VSS includes emerging markets small cap (both more expensive and less tax efficient). I doubt that explains all of it though, given how SCHF looks.

Schwab ETFs are nice. the iShares ETFs as well, not sure why Vanguard's compare so poorly.
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