Tax Loss Harvest - Muni Bond Question

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Ray3040
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Joined: Fri Oct 22, 2021 12:34 pm

Tax Loss Harvest - Muni Bond Question

Post by Ray3040 »

Hi Everyone:

Tax question regarding tax harvesting a paper loss. I have $100k invested in VNJUX nj muni bonds which right now has a paper loss of roughly $1700 even though I'm close to breakeven capital wise as the distributions are reinvested (purchased this year). I was thinking of selling this out near the end of the year and switching into either another nj muni fund from fidelity or trow etc or even another vanguard muni fund like a national one and then back into the NJ fund after the wash sale period.

My question is related to the December distributions - Vanguard will payout ST, LT Cap and the Dec payment all at the end of the month - the typical around the 28th-30th for record date. If I switch out before I assume I would not be eligible for any of them. If I sell out lets say on Dec 15th and into VWLUX instead am I then eligible for VWLUXs ST/LT/Div payments in Dec. Since I'm holding the VWLUX for such a shorter period of time are the ST/LT distributions effected at all or is the distribution of ST/LT gains the distribution and as long as you're a holder on the record date you receive it? Sorry if this is a dumb question - I've just never held funds - only stocks so I'm not used to ST/LT Cap Gain distributions.

Basically just trying to figure out the best of these 3 options 1. Swap into something else prior to the record dates in December 2. Hold onto VNJUX till after the record dates but sell before end of year or 3. Forget the harvesting and just hold VNJUX.

FYI - I have about $8000k in capital gains I will owe taxes on this year from other sales - that's why I'm looking to offset this with some harvest sales.

Thanks!
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grabiner
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Re: Tax Loss Harvest - Muni Bond Question

Post by grabiner »

The only timing issue is the taxes. Your total return is not affected by the exact day you sell, except for the daily return.

The capital gain distributions come from the fund's assets. Thus, if the market doesn't move, the fund price will drop by the amount of the distribution. You receive the entire distribution if you hold the fund on the distribution date, but your capital loss increases by an equal amount.

There is one special rule which doesn't usually matter. If you have held a share of a mutual fund for six months or less, and that share distributes a long-term gain, you must reclassify an amount equal to the long-term gain as a long-term rather than a short-term loss.\

Most muni funds, including this one, accrue dividends daily. Thus, if you sell on December 15, you get 15/31 of the December dividend. This also means that the dividend has no tax effect.

There is a six-month rule in this case as well, but it doesn't apply to funds which accrue dividends daily. (For ETFs, or those few muni funds which don't accrue daily, the rule is more serious; the capital loss must be decreased by the amount of the tax-exempt dividend.)
Wiki David Grabiner
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