Tax Gain Harvesting

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MichaelM
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Tax Gain Harvesting

Post by MichaelM » Wed Dec 13, 2017 9:45 am

Bogleheads, because my income is lower this year and some capital gains I own are large, I've got the idea to tax gain harvest then reinvest those gains right back into their same investment home. I'm looking for assurance that I understand the mechanics of the process. I may be over analyzing this (Virgo) but my thinking says: sell before ex div date and buy back after div/cap gains are distributed. I've not seen much on the timing aspects of what I'm wanting to do. Maybe selling before ex div date is meaningless? Michael

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triceratop
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Re: Tax Gain Harvesting

Post by triceratop » Wed Dec 13, 2017 9:51 am

MichaelM wrote:
Wed Dec 13, 2017 9:45 am
Bogleheads, because my income is lower this year and some capital gains I own are large, I've got the idea to tax gain harvest then reinvest those gains right back into their same investment home. I'm looking for assurance that I understand the mechanics of the process. I may be over analyzing this (Virgo) but my thinking says: sell before ex div date and buy back after div/cap gains are distributed. I've not seen much on the timing aspects of what I'm wanting to do. Maybe selling before ex div date is meaningless? Michael
I wouldn't take the risk by being out of the market for a day. If you want to play the div/cap gains game, find an appropriate fund/ETF (which you are comfortable holding long term) to switch to so that you'll take the same risks (similar market segment) but miss the ex-dividend days for both funds. It is possible. Or simply TGH into the same fund; that is what I do.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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mhc
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Re: Tax Gain Harvesting

Post by mhc » Wed Dec 13, 2017 9:53 am

Tax gain harvesting is a very sound tax strategy.

Avoiding a dividend is also a good strategy as long as the fund does not go up while you are out of the market.

MichaelM
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Re: Tax Gain Harvesting

Post by MichaelM » Wed Dec 13, 2017 10:23 am

Thanks for replies. Appreciate the cautions you give. I've pretty much decided that I want to do this just not sure on mechanics of it. After being in the market for a long time I'm not that concerned about being out for a day or two or three although I understand that a lot of the market gains come on just a few trading days in most years but I'm ok being out. Not interested in the ETF s angle at the moment. Just wanting to understand best process with least amount of angst of pulling of my fabulous idea. Thanks, MichaelM

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Re: Tax Gain Harvesting

Post by AnonJohn » Wed Dec 13, 2017 10:57 am

For speculative reasons I can't go into here, this year may be particularly advantageous. Unless you have an average cost basis or plan on liquidating lots based on FIFO in the future. (Look for news on FIFO to learn more).

Mechanically, if at Vanguard, watch out for the short term limits on buying / selling. Your sale to TGH will preclude buying the same fund (except by mail?) for 30 days.

Have you seen seen the wiki and Michael Kitces post?

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triceratop
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Re: Tax Gain Harvesting

Post by triceratop » Wed Dec 13, 2017 11:03 am

MichaelM wrote:
Wed Dec 13, 2017 10:23 am
Thanks for replies. Appreciate the cautions you give. I've pretty much decided that I want to do this just not sure on mechanics of it. After being in the market for a long time I'm not that concerned about being out for a day or two or three although I understand that a lot of the market gains come on just a few trading days in most years but I'm ok being out. Not interested in the ETF s angle at the moment. Just wanting to understand best process with least amount of angst of pulling of my fabulous idea. Thanks, MichaelM
"Don't let the tax tail wag the asset allocation dog" is an expression you here around here a lot, but never does it apply more than taking substantial sums out of the market for a short time for tax purposes.

If you are interested in "best process", it is not to be out of the market. The best process is more like (assuming you are in Vanguard Total Stock Market): exchange VTSAX into 80% VLCAX 20% VSMAX, or even 100% VLCAX.

You keep net exposure essentially the same.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

mega317
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Re: Tax Gain Harvesting

Post by mega317 » Wed Dec 13, 2017 11:14 am

If I estimated the math right, if the market is up 1% while you're out, it will cost you something like 4 times as much in final value over an investing lifetime if you're young.

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Re: Tax Gain Harvesting

Post by technovelist » Wed Dec 13, 2017 11:27 am

MichaelM wrote:
Wed Dec 13, 2017 9:45 am
Bogleheads, because my income is lower this year and some capital gains I own are large, I've got the idea to tax gain harvest then reinvest those gains right back into their same investment home. I'm looking for assurance that I understand the mechanics of the process. I may be over analyzing this (Virgo) but my thinking says: sell before ex div date and buy back after div/cap gains are distributed. I've not seen much on the timing aspects of what I'm wanting to do. Maybe selling before ex div date is meaningless? Michael
If you don't have to worry about short-term timing rules for your particular investment, I would just sell and rebuy the same thing instantly.

Otherwise, as some people here have explained, you can sell whatever you have and buy something almost identical.
In theory, theory and practice are identical. In practice, they often differ.

MichaelM
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Re: Tax Gain Harvesting

Post by MichaelM » Wed Dec 13, 2017 11:40 am

Appreciate all the replies. Wow, I thought I had a great idea here but maybe not so much after reading replies. I was thinking to take advantage of 0 cap gain tax up to limits in 15% tax bracket because I had little taxable income this year. FWIW all funds are at Vanguard and have avg cost basis. I thought with the idea to tax gain harvest I could dilute the avg cost basis and take advantage when I sell down the road a few years from now. Maybe it's not worth the $s? I was aware of the trading policy somewhat but could always buy similar fund for 30 days. FWIW I am over 55 years old. Thanks again for all the replies. MichaelM

rkhusky
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Re: Tax Gain Harvesting

Post by rkhusky » Wed Dec 13, 2017 11:41 am

mega317 wrote:
Wed Dec 13, 2017 11:14 am
If I estimated the math right, if the market is up 1% while you're out, it will cost you something like 4 times as much in final value over an investing lifetime if you're young.
And if the market drops 1%, you've gained an equivalent amount.

MichaelM
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Re: Tax Gain Harvesting

Post by MichaelM » Wed Dec 13, 2017 12:02 pm

AnonJohn, Ah, Michael Kitches post. Was not aware of this. Thanks for posting link. This should answer my questions. Thanks to all who read/replied to my post. Hope everyone has a great day. I plan to get this end of year tax planning out of my way as quickly as possible and move on to outdoor activities. MichaelM

mega317
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Re: Tax Gain Harvesting

Post by mega317 » Wed Dec 13, 2017 1:01 pm

rkhusky wrote:
Wed Dec 13, 2017 11:41 am
mega317 wrote:
Wed Dec 13, 2017 11:14 am
If I estimated the math right, if the market is up 1% while you're out, it will cost you something like 4 times as much in final value over an investing lifetime if you're young.
And if the market drops 1%, you've gained an equivalent amount.
Sure, but the market goes (has gone) up on average--you're more likely to miss an increase than a decrease. And the ultimate goal is to be invested.

mega317
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Re: Tax Gain Harvesting

Post by mega317 » Wed Dec 13, 2017 1:03 pm

MichaelM wrote:
Wed Dec 13, 2017 11:40 am
Wow, I thought I had a great idea here but maybe not so much after reading replies.
I hope you didn't get the idea that tax gain harvesting is a bad idea. I think the point up for discussion has been the strategy to avoid dividends.

rkhusky
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Re: Tax Gain Harvesting

Post by rkhusky » Wed Dec 13, 2017 1:07 pm

mega317 wrote:
Wed Dec 13, 2017 1:01 pm
rkhusky wrote:
Wed Dec 13, 2017 11:41 am
mega317 wrote:
Wed Dec 13, 2017 11:14 am
If I estimated the math right, if the market is up 1% while you're out, it will cost you something like 4 times as much in final value over an investing lifetime if you're young.
And if the market drops 1%, you've gained an equivalent amount.
Sure, but the market goes (has gone) up on average--you're more likely to miss an increase than a decrease. And the ultimate goal is to be invested.
Right. I think that I've seen estimates that the market rises 2/3 of the time and drops 1/3 of the time. On the other hand, people shouldn't be stressed out if a small fraction of their portfolio is out of the market for a day.

mega317
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Re: Tax Gain Harvesting

Post by mega317 » Wed Dec 13, 2017 1:11 pm

rkhusky wrote:
Wed Dec 13, 2017 1:07 pm
On the other hand, people shouldn't be stressed out if a small fraction of their portfolio is out of the market for a day.
I agree, but I think the point here is the risk probably isn't worth trying to avoid a dividend.

rkhusky
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Re: Tax Gain Harvesting

Post by rkhusky » Wed Dec 13, 2017 1:18 pm

mega317 wrote:
Wed Dec 13, 2017 1:11 pm
rkhusky wrote:
Wed Dec 13, 2017 1:07 pm
On the other hand, people shouldn't be stressed out if a small fraction of their portfolio is out of the market for a day.
I agree, but I think the point here is the risk probably isn't worth trying to avoid a dividend.
A back of the envelope calculation shows that the average daily return of the S&P 500 is about 0.03%. So, on average, that is what you are risking by being out of the market for a day - $30 on $100,000 worth of stock.

cyfairslam
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Re: Tax Gain Harvesting

Post by cyfairslam » Wed Dec 13, 2017 1:19 pm

Bogleheads, because my income is lower this year and some capital gains I own are large, I've got the idea to tax gain harvest then reinvest those gains right back into their same investment home
.

I am doing some tax gain harvesting myself right now. One of my positions was bought by another company resulting in a 11K capital gain. I am trying to obtain another 3k loss to get it up to 14k loss. I am at the highest tax bracket this year due to some company restricted stock maturing, so it is work my while. I am selling the same amount of company stock I just received but the price basis will be the stock I received in earlier years at a higher basis thus a loss.

Be aware, that I don't believe you can sell a particular stock and this buy the same stock back. What you can do is buy a similar stock or ETF back. For instance you can sell BP, but then just buy XOM.

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Re: Tax Gain Harvesting

Post by technovelist » Wed Dec 13, 2017 1:28 pm

cyfairslam wrote:
Wed Dec 13, 2017 1:19 pm
Bogleheads, because my income is lower this year and some capital gains I own are large, I've got the idea to tax gain harvest then reinvest those gains right back into their same investment home
.

I am doing some tax gain harvesting myself right now. One of my positions was bought by another company resulting in a 11K capital gain. I am trying to obtain another 3k loss to get it up to 14k loss. I am at the highest tax bracket this year due to some company restricted stock maturing, so it is work my while. I am selling the same amount of company stock I just received but the price basis will be the stock I received in earlier years at a higher basis thus a loss.

Be aware, that I don't believe you can sell a particular stock and this buy the same stock back. What you can do is buy a similar stock or ETF back. For instance you can sell BP, but then just buy XOM.
You are referring to the "wash sale" rule.

That applies only to sales that are made at a loss.

Sales that produce a capital gain, even if that capital gain is taxed at 0%, are not subject to that rule.
In theory, theory and practice are identical. In practice, they often differ.

MichaelM
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Re: Tax Gain Harvesting

Post by MichaelM » Wed Dec 13, 2017 2:07 pm

Ah, this subject can get tangled easy enough (wash sale rule) for different types of sales. Interesting to know the avg movement of daily market. I'm only going to sell approx 30/40K total of a couple of mutual funds and reinvest back into similar fund for 30 days then back into original fund. My original question had to do about timing of this in relation to ex div and distributions. I'm not really opposed to realizing the distribution and may just wait until after they are paid out and do this during last days of calendar year. Trying not to make this more complicated than necessary. As I said initially I probably was over thinking. Would not normally be considering this but have almost no taxable income this year & thought I might have an opportunity that I don't normally have. Thanks again to everyones posts. MichaelM

Nowizard
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Re: Tax Gain Harvesting

Post by Nowizard » Wed Dec 13, 2017 2:29 pm

The emotional gain from eliminating eventual taxation on large gains and the obvious desire to buy low and sell high may greatly over ride the possibility of losing some gains in the short run. As many say, evaluate your risk tolerance and respond accordingly.

Tim

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Re: Tax Gain Harvesting

Post by grabiner » Wed Dec 13, 2017 9:00 pm

MichaelM wrote:
Wed Dec 13, 2017 2:07 pm
Ah, this subject can get tangled easy enough (wash sale rule) for different types of sales. Interesting to know the avg movement of daily market. I'm only going to sell approx 30/40K total of a couple of mutual funds and reinvest back into similar fund for 30 days then back into original fund. My original question had to do about timing of this in relation to ex div and distributions.
If you hold a fund share when it makes a distribution, the share price will decrease by the amount of the distribution (plus market movements). This will reduce your capital gain, but if the distribution is a qualified dividend, the tax effect is the same.

If you hold a fund share for less than 61 days and you receive a dividend from that share, that dividend becomes non-qualified. (Dividends from shares you hold for 61 or more days become qualified.)

If you hold a fund share for 6 months or less and you receive a long-term capital gain distribution from that share, and you sell for a capital loss, an amount equal to the capital gain is reclassified from short-term loss to long-term loss. If you sell for a gain, it doesn't matter.
Wiki David Grabiner

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Re: Tax Gain Harvesting

Post by H-Town » Tue Jun 19, 2018 12:52 pm

MichaelM wrote:
Wed Dec 13, 2017 9:45 am
Bogleheads, because my income is lower this year and some capital gains I own are large, I've got the idea to tax gain harvest then reinvest those gains right back into their same investment home. I'm looking for assurance that I understand the mechanics of the process. I may be over analyzing this (Virgo) but my thinking says: sell before ex div date and buy back after div/cap gains are distributed. I've not seen much on the timing aspects of what I'm wanting to do. Maybe selling before ex div date is meaningless? Michael
I just want to bump this thread. Is anyone planning to do Tax Gain Harvest to take advantage of the new low tax rate? :moneybag

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Re: Tax Gain Harvesting

Post by LinusP » Tue Jun 19, 2018 2:34 pm

thangngo wrote:
Tue Jun 19, 2018 12:52 pm
I just want to bump this thread. Is anyone planning to do Tax Gain Harvest to take advantage of the new low tax rate? :moneybag
I plan on tax gain harvesting next year, and probably the year after. In my case, it's motivated more by moving taxable mutual funds to Vanguard, but it doesn't hurt that my wife left her job earlier this year to stay home with kids, giving us some headroom to take capital gains and still keep taxable income around the $77,400 threshold.

More in this thread: viewtopic.php?t=249767

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House Blend
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Re: Tax Gain Harvesting

Post by House Blend » Tue Jun 19, 2018 4:11 pm

thangngo wrote:
Tue Jun 19, 2018 12:52 pm
Is anyone planning to do Tax Gain Harvest to take advantage of the new low tax rate? :moneybag
The tax rates on long term capital gains have not changed.

So there's no extra incentive for tax gain harvesting this year as opposed to last year.

(The new tax law does have effects on deductions. Many taxpayers will likely see significant changes--up or down--in those amounts. Those deductions do affect how much room you have for harvesting gains.)

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grabiner
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Re: Tax Gain Harvesting

Post by grabiner » Tue Jun 19, 2018 7:00 pm

House Blend wrote:
Tue Jun 19, 2018 4:11 pm
thangngo wrote:
Tue Jun 19, 2018 12:52 pm
Is anyone planning to do Tax Gain Harvest to take advantage of the new low tax rate? :moneybag
The tax rates on long term capital gains have not changed.

So there's no extra incentive for tax gain harvesting this year as opposed to last year.
And it may actually be worse if you pay state taxes on those harvested gains, as the state taxes are unlikely to be deductible from your federal taxes; most gain harvesters now take the standard deduction.
Wiki David Grabiner

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