Should I tax loss harvest...?

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sarabayo
Posts: 91
Joined: Fri Jun 29, 2018 6:59 pm

Should I tax loss harvest...?

Post by sarabayo » Thu Oct 25, 2018 1:54 am

I've never done tax loss harvesting before, but maybe now's a good time to start. My taxable account's equity position is 100% VTSAX at the moment, and all my tax lots are currently in the red after the latest market close, with a total loss of ~$6k, all short-term. (I only started investing in taxable in August.) Seems like a good opportunity for TLH, right? I'm thinking I'll swap all my VTSAX shares for 81.43% VFIAX / 18.57% VEXAX, which is my estimate of the current composition of VTSAX.

But I feel like if I go down this road, I'm dooming myself to having some combination of VTSAX, VFIAX, and VEXAX in my taxable account forever. Not only is this more stuff to keep track of, but a portfolio with VFIAX and VEXAX in it might need some minor rebalancing once in a while to keep the ratio between them in line with the composition of VTSAX over time, which adds some more complexity.

If the market goes down even further by 30 days from tomorrow, I can do another TLH and get back to 100% VTSAX, which would be ideal. But of course there's no guarantee that will happen. How do people usually deal with this? Is having a bunch of different tickers knocking around in your taxable account an inevitable consequence of doing tax loss harvesting?

Here's my portfolio in case that's relevant:
Emergency funds: $30k, split into $5k in FDRXX, $4k in VMMXX, $21k in a CD (going to move that to VMMXX when it matures next year)
Debt: none
Tax Filing Status: Single
Tax Rate (marginal): 32% federal, 9.3% state (will likely decrease to 24% a few years from now as employer RSUs finish vesting)
State: CA
Age: 30
Desired asset allocation: 90/10
Desired international allocation: 40% (to mimic Vanguard's target retirement funds)

Current Retirement Assets (about $330k):

63.61% Taxable
  • 27.52% Vanguard Total Stock Market Index (VTSAX) (0.04%) at Vanguard
  • 36.09% 5-year biannually maturing CD ladder, avg yield 2.92%, at Fidelity
8.15% 403(b) (previous employer, at TIAA, 100% Roth):
  • 8.15% TIAA-CREF S&P 500 Index (TISPX) (0.06%)
18.84% 401(k) (current employer, at Fidelity, currently 15% traditional / 85% roth):
  • 1.91% Vanguard Extended Market Index Trust (~VSEMX) (0.04%)
  • 16.93% Vanguard Total International Stock Market Index Trust (~VTISX) (0.07%)
9.40% Roth IRA (at Vanguard):
  • 1.43% Vanguard Total Stock Market Index (VTSAX) (0.04%)
  • 7.97% Vanguard Total International Stock Market Index (VTIAX) (0.11%)
Current asset allocation is 63.91% stocks, 36.09% fixed income (CDs). Current international allocation within stocks is 38.96%.

Contributions:

New Annual Contributions, starting this year:
  • $22.1k pre-tax to 401(k)
  • $24.5k Roth to 401(k) via mega backdoor
  • $5.5k Roth to IRA via backdoor
  • Some amount to taxable, depending on how much spare cash I have in the given year. Probably $20k+ per year I would guess.
Other available funds (ignoring company stock and high-ER funds):

403(b):
  • TIAA-CREF International Equity Index (TCIEX) (0.06%)
  • TIAA-CREF Small-Cap Blend Index (TISBX) (0.06%)
  • Vanguard Short-Term Bond Index (VBITX) (0.05%)
401(k):
  • Vanguard 500 Index Trust (~VFFSX) (0.01%)
  • Vanguard Total Bond Market Index Trust (~VTBSX) (0.03%)
  • Vanguard Target Retirement funds, 2015-2065 and Income (all 0.05%)
Last edited by sarabayo on Fri Oct 26, 2018 12:03 am, edited 1 time in total.

ivk5
Posts: 480
Joined: Thu Sep 22, 2016 9:05 am

Re: Should I tax loss harvest...?

Post by ivk5 » Thu Oct 25, 2018 4:32 am

sarabayo wrote:
Thu Oct 25, 2018 1:54 am
Seems like a good opportunity for TLH, right?
Yup.
sarabayo wrote:
Thu Oct 25, 2018 1:54 am
Is having a bunch of different tickers knocking around in your taxable account an inevitable consequence of doing tax loss harvesting?
Yes, but it doesn't need to be a "bunch."

You get to decide how aggressively to TLH and how many TLH partners to use. I would just use 100% VFIAX [VG 500 Index] as TLH partner for VTSAX and not bother with the completion index in taxable. Since you already have the completion index in your 401k, you can tweak a little there if you like (I wouldn't bother).

Then if the decline continues, you get to decide if you want to TLH VFIAX to a third fund (eg VLCAX, VG's Large Cap Index) or just wait until 31 days after you TLH'd VTSAX and go back to there if you still have a loss on VFIAX.
sarabayo wrote:
Thu Oct 25, 2018 1:54 am
Here's my portfolio in case that's relevant:
Watch for potential wash sale with VTSAX in your Roth IRA (recent dividend reinvestment, as well as any recent contributions). Wash sale with replacement shares in IRA/Roth is particularly insidious since the disallowed loss is unrecoverable (no basis adjustment).

Good idea to turn off dividend reinvestment in your Roth to reduce risk of this in future, or make sure your Roth holds asset classes you are not planning to mess with in taxable.

metrunt
Posts: 275
Joined: Thu Jul 16, 2015 9:36 am

Re: Should I tax loss harvest...?

Post by metrunt » Thu Oct 25, 2018 6:17 am

Why forever? You can only use $3K of the loss this year to offset income (assuming no other short term gain). So next year, if there's a gain, sell before it's a $3K gain and before it becomes long term. If there's a loss, TLH again, offset $3K in income and repeat.

ivk5
Posts: 480
Joined: Thu Sep 22, 2016 9:05 am

Re: Should I tax loss harvest...?

Post by ivk5 » Thu Oct 25, 2018 6:26 am

metrunt wrote:
Thu Oct 25, 2018 6:17 am
Why forever? You can only use $3K of the loss this year to offset income (assuming no other short term gain). So next year, if there's a gain, sell before it's a $3K gain and before it becomes long term. If there's a loss, TLH again, offset $3K in income and repeat.
Losses carry forward indefinitely, giving you -$3K adjustment to ordinary income each year, plus cushioning truly unavoidable realized gains.

I think most of us would not waste carryover losses by unnecessarily realizing gains, including for cosmetic portfolio cleanup.

metrunt
Posts: 275
Joined: Thu Jul 16, 2015 9:36 am

Re: Should I tax loss harvest...?

Post by metrunt » Thu Oct 25, 2018 6:35 am

Fair enough.

sarabayo
Posts: 91
Joined: Fri Jun 29, 2018 6:59 pm

Re: Should I tax loss harvest...?

Post by sarabayo » Thu Oct 25, 2018 10:28 am

ivk5 wrote:
Thu Oct 25, 2018 4:32 am
sarabayo wrote:
Thu Oct 25, 2018 1:54 am
Is having a bunch of different tickers knocking around in your taxable account an inevitable consequence of doing tax loss harvesting?
Yes, but it doesn't need to be a "bunch."

You get to decide how aggressively to TLH and how many TLH partners to use. I would just use 100% VFIAX [VG 500 Index] as TLH partner for VTSAX and not bother with the completion index in taxable. Since you already have the completion index in your 401k, you can tweak a little there if you like (I wouldn't bother).

Then if the decline continues, you get to decide if you want to TLH VFIAX to a third fund (eg VLCAX, VG's Large Cap Index) or just wait until 31 days after you TLH'd VTSAX and go back to there if you still have a loss on VFIAX.
Oh, I didn't even think about having three TLH alternatives. That lets me be a little more "nimble" but at the expense of even more portfolio complexity :)

I'm a little surprised that VTSAX, VFIAX, and VLCAX are considered sufficiently interchangeable for TLH purposes. Isn't it important that the latter two are missing the smaller end of the market? The point of passive indexing is that by owning everything you are on both the winning and losing sides of every bet people make in the market, so if you're only holding large caps you lose out when people start buying small caps... right?

I mean, if I only needed a temporary substitute for VTSAX, sure, but if the market shoots up tomorrow I may be "stuck with" VFIAX or VLCAX forever, so it seems important to make sure my TLH partners properly fit my asset allocation goals...
ivk5 wrote:
Thu Oct 25, 2018 4:32 am
sarabayo wrote:
Thu Oct 25, 2018 1:54 am
Here's my portfolio in case that's relevant:
Watch for potential wash sale with VTSAX in your Roth IRA (recent dividend reinvestment, as well as any recent contributions). Wash sale with replacement shares in IRA/Roth is particularly insidious since the disallowed loss is unrecoverable (no basis adjustment).

Good idea to turn off dividend reinvestment in your Roth to reduce risk of this in future, or make sure your Roth holds asset classes you are not planning to mess with in taxable.
Good idea, I'll turn off reinvestment in my Roth until I'm done with the TLH process.

ivk5
Posts: 480
Joined: Thu Sep 22, 2016 9:05 am

Re: Should I tax loss harvest...?

Post by ivk5 » Thu Oct 25, 2018 10:57 am

sarabayo wrote:
Thu Oct 25, 2018 10:28 am
I'm a little surprised that VTSAX, VFIAX, and VLCAX are considered sufficiently interchangeable for TLH purposes. Isn't it important that the latter two are missing the smaller end of the market? The point of passive indexing is that by owning everything you are on both the winning and losing sides of every bet people make in the market, so if you're only holding large caps you lose out when people start buying small caps... right?
Try running them through Portfolio Visualizer. Over long term, differences are pretty modest. As mentioned, if you want to add small or extended market in tax-advantaged, that's always an option (and simpler than slicing/dicing in taxable, for TLH purposes).
sarabayo wrote:
Thu Oct 25, 2018 10:28 am
I'll turn off reinvestment in my Roth until I'm done with the TLH process.
Remember it's a 61-day window extending 30 days on either side of sale date. So you may have had dividend reinvest around end Sept / beginning Oct which would be an issue. Also, even when you manually reinvest, you are essentially committing to not TLH'ing for 30 days. That's why some ppl like to hold a different asset class there altogether. (I don't but might make the switch.)

MotoTrojan
Posts: 2645
Joined: Wed Feb 01, 2017 8:39 pm

Re: Should I tax loss harvest...?

Post by MotoTrojan » Thu Oct 25, 2018 11:05 am

I would use Large-Cap as it has more companies than S&P500, and then use S&P500 as your 3rd partner if it drops further.

I would not bother with the small-caps to balance things out, but that is just me. I consider all 3 large-cap/total funds equivalent and would hold any of them forever as part of my Total US Market allocation. I do tilt to small-value though so that makes me feel less bad about missing out on a little small-cap exposure... but in the long-term the correlation and returns are almost identical.

sarabayo
Posts: 91
Joined: Fri Jun 29, 2018 6:59 pm

Re: Should I tax loss harvest...?

Post by sarabayo » Thu Oct 25, 2018 11:21 am

ivk5 wrote:
Thu Oct 25, 2018 10:57 am
Remember it's a 61-day window extending 30 days on either side of sale date. So you may have had dividend reinvest around end Sept / beginning Oct which would be an issue. Also, even when you manually reinvest, you are essentially committing to not TLH'ing for 30 days. That's why some ppl like to hold a different asset class there altogether. (I don't but might make the switch.)
Oh, darn it. I did get a dividend, but only of a few hundred dollars, at the end of September. Should I be worrying about that, if the capital loss I'm harvesting is like 10x the size of the dividend? I'm starting to think I don't understand what I'm doing well enough to do tax loss harvesting yet... will my tax forms from Vanguard automatically figure all this out for me, or will I need to do the math myself?

By the way, in my 401(k) I have "trusts" that invest in Vanguard funds but don't produce dividends. Presumably the dividends from the underlying funds are just reabsorbed by the trust and I never see them. I guess those dividends shouldn't affect my tax loss harvesting, right? (Well, at the moment I'm not holding a total stock market fund in there, but suppose that I was.)

ofckrupke
Posts: 555
Joined: Mon Jan 10, 2011 2:26 pm

Re: Should I tax loss harvest...?

Post by ofckrupke » Thu Oct 25, 2018 1:22 pm

sarabayo wrote:
Thu Oct 25, 2018 11:21 am
Oh, darn it. I did get a dividend, but only of a few hundred dollars, at the end of September. Should I be worrying about that, if the capital loss I'm harvesting is like 10x the size of the dividend?
Depends on whether you think it's worth a couple of bucks to rub your own nose in the formal error (and work it out to the penny to help you remember).
[From the info presented earlier, maybe $65k of VTSAX in taxable and $4k in the Roth IRA, so the "replacement shares" from the reinvested dividend in the latter amount to probably around $20 (one quarter of an annual 2% of the $4k). The wash sale lot in taxable might be down 10%, and the part of the disallowed loss that you can never be made whole on, because the replacement shares for that part are in an IRA, should in this case also be at most around 10%...of the $20. As for the much (~16x) larger disallowed wash-sale loss from the reinvested dividend in taxable, you get made whole on that by selling that reinvestment/replacement-share tax lot too - its basis gets adjusted upward by an amount matching the associated disallowed loss on the wash sale lot(s). ]

There should be no wash sale concern wrt the identified collective investment trusts in the 401k.

sarabayo
Posts: 91
Joined: Fri Jun 29, 2018 6:59 pm

Re: Should I tax loss harvest...?

Post by sarabayo » Fri Oct 26, 2018 12:02 am

ofckrupke wrote:
Thu Oct 25, 2018 1:22 pm
[From the info presented earlier, maybe $65k of VTSAX in taxable and $4k in the Roth IRA, so the "replacement shares" from the reinvested dividend in the latter amount to probably around $20 (one quarter of an annual 2% of the $4k). The wash sale lot in taxable might be down 10%, and the part of the disallowed loss that you can never be made whole on, because the replacement shares for that part are in an IRA, should in this case also be at most around 10%...of the $20. As for the much (~16x) larger disallowed wash-sale loss from the reinvested dividend in taxable, you get made whole on that by selling that reinvestment/replacement-share tax lot too - its basis gets adjusted upward by an amount matching the associated disallowed loss on the wash sale lot(s). ]
I have about $90-95k of VTSAX in taxable and $5k in the Roth IRA. (Sorry, the total dollar amount was inaccurate in the OP since I copied and pasted from an old post back in July.)

Unfortunately a large part of the VTSAX in taxable was bought within the last 30 days -- I previously had some FSTVX at Fidelity, and when it went slightly red earlier this month I thought it was a good opportunity to move it to Vanguard without incurring capital gains. Now that I think about it, I guess that means I've already done a small TLH recently without really "intending" to (in that I exchanged FSTVX for VTSAX for an actual reason, not just because I wanted to book a loss).

I simply didn't realize that wash sales can occur even when the buy comes before the sell, which was a dire failure of research on my part! So I'm going to have to give up on this TLH opportunity. I guess I'll wait a month and hope the market is still down :)

Actually, I've been buying VTSAX in taxable on a regular basis, at least once every couple weeks or so. I guess that makes it impossible to do tax loss harvesting at short notice, since ideally I'd want let a 30-day "silent period" elapse before selling. Hmm...
ofckrupke wrote:
Thu Oct 25, 2018 1:22 pm
There should be no wash sale concern wrt the identified collective investment trusts in the 401k.
Thanks, that's good to know for future reference.

ivk5
Posts: 480
Joined: Thu Sep 22, 2016 9:05 am

Re: Should I tax loss harvest...?

Post by ivk5 » Fri Oct 26, 2018 12:11 am

No, not an issue when you’re selling the shares you just bought (since those will generally be among your highest basis shares). Buy away, and TLH when opportunities present.

You may still have good TLH opportunity now. Prob poster was pointing out that the wash sale impact of dividend reinvestment is probably very small and perhaps permanent loss of the loss (so to speak) on a couple shared would be well worth the experience and getting comfortable/confident executing TLH.

sarabayo
Posts: 91
Joined: Fri Jun 29, 2018 6:59 pm

Re: Should I tax loss harvest...?

Post by sarabayo » Sun Oct 28, 2018 5:41 am

Ah, OK, I think I've got it now. Sorry, I'm finding this all really confusing for some reason. Maybe because I was feeling so rushed to do it quickly before the market went up again :P Market timing is stressful...

Anyway, I succeeded in netting about $6500 in capital losses, which should keep me maxed out in income deductions for this year and next. Thanks all! I still feel a little nervous being tilted towards large cap, but oh well.

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