Is Capital Loss Harvesting Overvalued?

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Tyr0ne
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Joined: Thu May 10, 2012 1:35 pm

Is Capital Loss Harvesting Overvalued?

Post by Tyr0ne »

http://www.kitces.com/blog/archives/509 ... alued.html

An interesting article for some of the more beginner investors on this forum (including myself) about tax loss harvesting. The benefits of tax loss harvesting may not be worth the hassle if your investment isn't large enough or the unrealized loss isn't big enough, although the exercise of doing so can't hurt.

What had me thinking was this statement:
Thus, the true value of harvesting the capital loss is the opportunity to invest the near-term tax savings for growth
From a cash flow standpoint, TLH'ing is excellent for reducing your bill come tax time. But from an investment standpoint, one must actually re-invest the savings from your tax bill to truly capture the value of TLH'ing (which I'm assuming most people don't actually do, they just pay less tax in April). Is this correct??
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House Blend
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Joined: Fri May 04, 2007 1:02 pm

Re: Is Capital Loss Harvesting Overvalued?

Post by House Blend »

Tyr0ne wrote:
Thus, the true value of harvesting the capital loss is the opportunity to invest the near-term tax savings for growth
From a cash flow standpoint, TLH'ing is excellent for reducing your bill come tax time. But from an investment standpoint, one must actually re-invest the savings from your tax bill to truly capture the value of TLH'ing (which I'm assuming most people don't actually do, they just pay less tax in April). Is this correct??
Here's an active thread on exactly the same topic.
http://www.bogleheads.org/forum/viewtop ... 1&t=115773

I have no idea what "most people" do, but any BH who simply sells shares at a loss without maintaining their AA at the same time doesn't understand CLH (aka TLH).

There are two main benefits to CLH:

1. The opportunity to deduct $3K of losses/year against $3K of ordinary income, thereby saving $3K x (your marginal rate now) less $3K times (your LTCG tax rate in the future).

2. The opportunity to postpone realizing capital gains further into the future. Postponing a tax means that you get to keep the gains on the money that would otherwise have paid the tax.

Number 2 can be a big win if the capital gains exposure gets postponed to infinity--as happens when you donate or bequeath shares. It can also be a big win if your future LTCG tax rate is lower--such as in retirement.
billern
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Joined: Fri Dec 07, 2007 3:08 pm

Re: Is Capital Loss Harvesting Overvalued?

Post by billern »

Tyr0ne wrote:http://www.kitces.com/blog/archives/509 ... alued.html

An interesting article for some of the more beginner investors on this forum (including myself) about tax loss harvesting. The benefits of tax loss harvesting may not be worth the hassle if your investment isn't large enough or the unrealized loss isn't big enough, although the exercise of doing so can't hurt.

What had me thinking was this statement:
Thus, the true value of harvesting the capital loss is the opportunity to invest the near-term tax savings for growth
From a cash flow standpoint, TLH'ing is excellent for reducing your bill come tax time. But from an investment standpoint, one must actually re-invest the savings from your tax bill to truly capture the value of TLH'ing (which I'm assuming most people don't actually do, they just pay less tax in April). Is this correct??
I'm not sure I understand your point. In most cases, the tax loss harvesting prevents a taxpayer from paying tax on realized gains. If the loss harvesting was not done, the taxpayer would have to take money from somewhere to pay the tax. Often this is going to come from the investment account where stocks or bonds would have to be sold to get the funds to pay the tax. By not paying the tax, the money continues to be invested and earns a return.
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