Tax loss harvesting: Long term vs. short term losses.

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MNGopher
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Tax loss harvesting: Long term vs. short term losses.

Post by MNGopher » Sat Oct 13, 2018 1:03 pm

I was thinking of doing my first attempt at tax loss harvesting with some VTIAX that has depreciated. I have different lots, some that have long term capital losses and some with short term capital losses. What are the pros and cons to harvesting short term losses vs. long term losses, or does it really matter?

I am working, and would be using this to offset ordinary income.

livesoft
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by livesoft » Sat Oct 13, 2018 1:23 pm

It matters. Always harvest short-term losses before they become long-term. It is good to have short-term losses in case you need to offset short-term gains during rebalancing, selling for expenses, etc.

Always harvest long-term losses which you should only have because prices are got lower than 12 months ago.

Always harvest all losses because it prevents loss aversion.
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MNGopher
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by MNGopher » Sun Oct 14, 2018 1:11 pm

Thanks livesoft. So just to clarify I can just click on all my VITAX lots (lump sum purchases, distributions, both short and long term) that show losses and exchange them immediately for VTSAX, VEMAX, etc? Since no VITAX dividend distributions are scheduled until late December, I can't accidently trigger a wash sale unless I buy a lump sum within 31 days. I can see how this would "clean up" records if done regularly.

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kenyan
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by kenyan » Sun Oct 14, 2018 1:56 pm

MNGopher wrote:
Sun Oct 14, 2018 1:11 pm
Thanks livesoft. So just to clarify I can just click on all my VITAX lots (lump sum purchases, distributions, both short and long term) that show losses and exchange them immediately for VTSAX, VEMAX, etc? Since no VITAX dividend distributions are scheduled until late December, I can't accidently trigger a wash sale unless I buy a lump sum within 31 days. I can see how this would "clean up" records if done regularly.
Not quite. You also need to make sure that you didn't buy any in the past 30 days (unless you also sell all of those). In this case, there was a distribution in the past 30 days, so you'd better make sure you sell those lots, or wait until the 30 days is past. VITAX is down pretty big since the ex-dividend date, so you were likely going to do this, but for future reference.

Also, since you don't mention it, don't buy the sold fund through any method for the next 31 days, including recurring 401k purchases or otherwise.
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MNGopher
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by MNGopher » Sun Oct 14, 2018 2:11 pm

kenyan wrote:
Sun Oct 14, 2018 1:56 pm
MNGopher wrote:
Sun Oct 14, 2018 1:11 pm
Thanks livesoft. So just to clarify I can just click on all my VITAX lots (lump sum purchases, distributions, both short and long term) that show losses and exchange them immediately for VTSAX, VEMAX, etc? Since no VITAX dividend distributions are scheduled until late December, I can't accidently trigger a wash sale unless I buy a lump sum within 31 days. I can see how this would "clean up" records if done regularly.
Not quite. You also need to make sure that you didn't buy any in the past 30 days (unless you also sell all of those). In this case, there was a distribution in the past 30 days, so you'd better make sure you sell those lots, or wait until the 30 days is past. VITAX is down pretty big since the ex-dividend date, so you were likely going to do this, but for future reference.

Also, since you don't mention it, don't buy the sold fund through any method for the next 31 days, including recurring 401k purchases or otherwise.
OK, thanks. Would a target date fund in a tax advantaged account that contains some VTIAX be considered substantially identical?

drk
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by drk » Sun Oct 14, 2018 2:29 pm

MNGopher wrote:
Sun Oct 14, 2018 2:11 pm
OK, thanks. Would a target date fund in a tax advantaged account that contains some VTIAX be considered substantially identical?
No.

Moreover, the poster above is incorrect: the IRS has never indicated that it considers employer-sponsored plans (e.g., 401k, 401a, 403b) for wash-sale purposes. You could still make a regular purchase of VTIAX in a 401k, but you would create a wash-sale (i.e. you would lose the tax loss) if you did so in an IRA.

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kenyan
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by kenyan » Tue Oct 16, 2018 9:18 am

drk wrote:
Sun Oct 14, 2018 2:29 pm
MNGopher wrote:
Sun Oct 14, 2018 2:11 pm
OK, thanks. Would a target date fund in a tax advantaged account that contains some VTIAX be considered substantially identical?
No.

Moreover, the poster above is incorrect: the IRS has never indicated that it considers employer-sponsored plans (e.g., 401k, 401a, 403b) for wash-sale purposes. You could still make a regular purchase of VTIAX in a 401k, but you would create a wash-sale (i.e. you would lose the tax loss) if you did so in an IRA.
I wouldn't go that far. The IRS has specifically stated that it applies to IRAs, but didn't say that the rule doesn't apply to employer-sponsored accounts that aren't IRAs. It is hardly established conclusively that 401k etc. purchases are definitely not wash sale bait as you imply, and given the precedent specifically set with IRAs, it's only a small leap for other plans.

There is substantial disagreement on this issue, so you shouldn't be presenting it as established (for that matter, I shouldn't, either). Nevertheless, I'll say that it's not going to do the OP that much harm if the IRS disallows some losses due to this, and then maybe we could have some clarity, too!
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drk
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by drk » Tue Oct 16, 2018 9:41 am

kenyan wrote:
Tue Oct 16, 2018 9:18 am
I wouldn't go that far. The IRS has specifically stated that it applies to IRAs, but didn't say that the rule doesn't apply to employer-sponsored accounts that aren't IRAs. It is hardly established conclusively that 401k etc. purchases are definitely not wash sale bait as you imply, and given the precedent specifically set with IRAs, it's only a small leap for other plans.

There is substantial disagreement on this issue, so you shouldn't be presenting it as established (for that matter, I shouldn't, either). Nevertheless, I'll say that it's not going to do the OP that much harm if the IRS disallows some losses due to this, and then maybe we could have some clarity, too!
Ah, but I'm only commenting on the law as it is: the IRS really hasn't indicated that it considers employer-sponsored plans (e.g., 401k, 401a, 403b) for wash-sale purposes. Anything else is speculation (with an assumption that the IRS will seek to apply any negative rule changes retroactively).

For OP's sake, I'll note that my money and mouth are cohabitants: in February I harvested losses in VXUS and VOO in between 401k contributions that went into collective investment trust versions of Vanguard Total International and Vanguard 500.

livesoft
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by livesoft » Tue Oct 16, 2018 10:13 am

Listen everybody. A wash sale created by a purchase in taxable account is NOT illegal and is of NO MAJOR consequence.

So one can sell positions purchased in the past 30 days for a loss without creating a wash sale. One just has to read the IRS Publication 550 beyond the words about the 30 days to see how that works. It may require one to fill out their tax return in order to see how this works.
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Earl Lemongrab
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by Earl Lemongrab » Tue Oct 16, 2018 12:10 pm

kenyan wrote:
Tue Oct 16, 2018 9:18 am
I wouldn't go that far. The IRS has specifically stated that it applies to IRAs, but didn't say that the rule doesn't apply to employer-sponsored accounts that aren't IRAs. It is hardly established conclusively that 401k etc. purchases are definitely not wash sale bait as you imply, and given the precedent specifically set with IRAs, it's only a small leap for other plans.
Then why even say anything at all? If they can just add account types when they feel like it, they could have just started doing IRAs. They did a lot of research and wrote out a justification for the IRAs, ten years ago. Do you think they "forgot" about 401(k)s during the process?

Follow the regulations and publications as written. Don't make up your own.
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goingup
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by goingup » Tue Oct 16, 2018 12:17 pm

MNGopher wrote:
Sun Oct 14, 2018 2:11 pm
OK, thanks. Would a target date fund in a tax advantaged account that contains some VTIAX be considered substantially identical?
No. A target date fund is not substantially (or even remotely) identical to VTIAX. :D

megabad
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by megabad » Tue Oct 16, 2018 1:39 pm

livesoft wrote:
Sat Oct 13, 2018 1:23 pm
It matters. Always harvest short-term losses before they become long-term. It is good to have short-term losses in case you need to offset short-term gains during rebalancing, selling for expenses, etc.

Always harvest long-term losses which you should only have because prices are got lower than 12 months ago.

Always harvest all losses because it prevents loss aversion.
Well while I agree with your recommendations (assuming no transaction costs), I have a small quibble with your language. Not to nitpick (especially you) but "always" is a rather strong word.

Maybe "always if":
You do not foresee your LTCG tax rate increasing dramatically in the future.

Now granted, this probably doesn't apply to many folks in the current tax environment, but it might. This might apply to folks that are currently in the 0% LTCG bracket. If these folks were say a few years from retirement and deliberately had low "taxable" income and were destined to face high pensions/SS in a few years that increased their LTCG bracket, then they might end up paying more in capital gains taxes by harvesting losses depending on market conditions.

But generally I would agree that harvesting long term losses is wise (at least as long as they are or will be deductible). Ideally, if your goal is to pay as little tax as possible, I would probably harvest all deductible losses every year and then pass the taxable holdings on to your descendants or donate to charity.

livesoft
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by livesoft » Tue Oct 16, 2018 1:52 pm

megabad wrote:
Tue Oct 16, 2018 1:39 pm
Well while I agree with your recommendations (assuming no transaction costs), I have a small quibble with your language. Not to nitpick (especially you) but "always" is a rather strong word.
No worries, I don't mind at all. Sometimes I write something just to get someone to comment and your comment was very appropriate. Thanks!
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MrBeaver
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by MrBeaver » Tue Oct 16, 2018 10:01 pm

megabad wrote:
Tue Oct 16, 2018 1:39 pm
livesoft wrote:
Sat Oct 13, 2018 1:23 pm
It matters. Always harvest short-term losses before they become long-term. It is good to have short-term losses in case you need to offset short-term gains during rebalancing, selling for expenses, etc.

Always harvest long-term losses which you should only have because prices are got lower than 12 months ago.

Always harvest all losses because it prevents loss aversion.
Well while I agree with your recommendations (assuming no transaction costs), I have a small quibble with your language. Not to nitpick (especially you) but "always" is a rather strong word.

Maybe "always if":
You do not foresee your LTCG tax rate increasing dramatically in the future.

Now granted, this probably doesn't apply to many folks in the current tax environment, but it might. This might apply to folks that are currently in the 0% LTCG bracket. If these folks were say a few years from retirement and deliberately had low "taxable" income and were destined to face high pensions/SS in a few years that increased their LTCG bracket, then they might end up paying more in capital gains taxes by harvesting losses depending on market conditions.

But generally I would agree that harvesting long term losses is wise (at least as long as they are or will be deductible). Ideally, if your goal is to pay as little tax as possible, I would probably harvest all deductible losses every year and then pass the taxable holdings on to your descendants or donate to charity.
There is a lot of wisdom here. As one currently in the 0% bracket who will hopefully be above that in the future, I have found one other odd situation:

Taking short term losses when you have long term gains but no short term gains is a tax negative. It offsets 0% LTCG which carries $0 in benefit by increasing future gains (short or long) at a rate which could very well be more than 0%.

I wish interest income counted as short term capital gains as far as tax loss harvesting goes…

MNGopher
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by MNGopher » Tue Oct 16, 2018 10:18 pm

goingup wrote:
Tue Oct 16, 2018 12:17 pm
MNGopher wrote:
Sun Oct 14, 2018 2:11 pm
OK, thanks. Would a target date fund in a tax advantaged account that contains some VTIAX be considered substantially identical?
No. A target date fund is not substantially (or even remotely) identical to VTIAX. :D
VTTVX IS 24.9% identical :wink: but I guess since it's in a 403B it wouldn't matter even if it was more identical.

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White Coat Investor
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by White Coat Investor » Tue Oct 16, 2018 11:16 pm

drk wrote:
Sun Oct 14, 2018 2:29 pm
MNGopher wrote:
Sun Oct 14, 2018 2:11 pm
OK, thanks. Would a target date fund in a tax advantaged account that contains some VTIAX be considered substantially identical?
No.

Moreover, the poster above is incorrect: the IRS has never indicated that it considers employer-sponsored plans (e.g., 401k, 401a, 403b) for wash-sale purposes. You could still make a regular purchase of VTIAX in a 401k, but you would create a wash-sale (i.e. you would lose the tax loss) if you did so in an IRA.
That's interesting. Not that it really matters either way in reality. As near as I can tell, it's basically just the honor system on this point. The only thing anyone ever looks at is one taxable account brokerage would see you bought the same CUSIP within 30 days. Sell one at Vanguard and buy at Fidelity and I don't think anyone is really watching. Like so much else in the tax code, it comes down to you knowing the rules and following them because they're the rules. Has ANYONE ever even heard of someone being audited on their tax loss harvesting?
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flroots
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by flroots » Sun Oct 28, 2018 1:43 pm

I'm planning to sell VO and SPMD ETFs. I am torn between using VOE or IWR to replace VO? I plan to buy IJH to replace SPMD. Any thoughts or suggestions would be appreciated. Both VO and SPMD have short term losses.

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Earl Lemongrab
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Re: Tax loss harvesting: Long term vs. short term losses.

Post by Earl Lemongrab » Sun Oct 28, 2018 2:02 pm

I doubt there's been an audit for TLH. The "fear" is that if there is some other audit the auditor could check everything and request records for other accounts.

People get weirdly fearful of highly improbable events. And in this case, a low-impact one. The police are not going to kick down your door and do a perp-walk in front of the neighbors for wash sales.

My favorite example of perspective is that every year (including this one) people are injured or killed by debris flying in through their windshields on the highways. That's a real danger with real, potentially severe, consequences. But we don't find a dozen questions on Personal Consumer on how to avoid that.
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