TLH for absolute dummies [Tax Loss Harvesting]

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ebotrd
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by ebotrd » Sat Sep 05, 2015 4:12 pm

Understood.
I'm just not seeing any downside - not sure if I have blinders on being a newbie. Does anyone think I'm overlooking something?
I know VFWAX holds less than half the # stocks that VTIAX holds, but their regional allocations and it seems all other parameters are almost identical. Is this relatively minor difference the only potential downside?
I guess if I wanted to minimize the effect of sacrificing the higher # stocks that VTIAX holds, that would argue for going SpecID with VTIAX and holding those transactions with gains. I'm obviously no expert, but it seems like this would be a minor difference and unimportant relative to the benefit of taking full advantage of TLH.

If I do go ahead, I checked out the actual steps:
So, I'd go to my VTIAX, click "Exch".
Click all the shares that have losses (all of them in my case) = 8,626.730 shares currently. (So I can just click "Sell all shares").
Order type: Market...assuming this is fine if it's set to execute first thing Monday morning.
Then for "2. Where's the money going?" I'll click "Add another Vanguard mutual fund", type in vfwax, 100%.

And that's it?
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Sat Sep 05, 2015 4:16 pm

That's it …
… except there are no "Market" orders for mutual fund shares and the shares only change hands at the end of the next day the market is open. The market is not open on Monday, so the exchange would take place after 4 pm eastern on Tuesday.

You could submit the order anytime between now and about 3:50 pm on Tuesday and still have the exchange accomplished at 4 pm on Tuesday. Remember that Vanguard does not let one cancel mutual fund orders, so why don't you sleep on this until Tuesday afternoon and submit the order then?
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by ebotrd » Sat Sep 05, 2015 8:31 pm

Oh, yeah, I did another test run and it doesn't even give the option to choose an order type (Market vs limit vs stop, etc) when exchanging VTIAX. I don't know what I was looking at - maybe I was doing that test run on VXUS.
Anyway, mulling that over I guess ETF's kind of have an advantage over Admiral Shares/index funds in general in this regard (although ETFs would have the $7 fee to make the trade). I guess the risk is the share price could shoot up and you loose some/all of your TLH benefit (and would you also have LTCG taxes to pay?).

I read some comments about that issue of it taking all day to execute and the advice (in this example) was to watch the most-equivalent ETF (VXUS here) share price activity and see where the share price is at about 4pm EST as sort of a gauge (still no guarantees). If share prices rose a lot, you'd do better just choosing the loser transactions through SpecID.

I also read some on the dividend issue. Looks like both VTIAX and VFWAX are due for their dividends the week of 9/21. For me they seem to range anywhere from $400 to $1600 bucks. My understanding is it'd be ideal (as for any TLH move) to dump VTIAX right before that dividend is applied, and then buy VFWAX right after it's dividend. I imagine this means holding off on the buy part of the plan for a day or two until VFWAX gets it's dividend. Not sure worrying about the dividend is worth it -- probably pretty miniscule issue when considering a $200k transaction to TLH $18k...especially when you factor in the risk that VFWAX could possibly shoot up during that wait. Am I on target here?

Both of these issues make me think it may be smarter to aim for a smaller TLH target - maybe just $3 to $6k in losses (rather than $18k).
Last edited by ebotrd on Mon Sep 07, 2015 12:49 pm, edited 1 time in total.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Sat Sep 05, 2015 8:37 pm

You are clearly overthinking this.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by ebotrd » Sun Sep 06, 2015 12:02 am

Oh good. That is a good sign that I'm ready. :sharebeer
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by jay22 » Sun Sep 06, 2015 12:12 am

If I TLH, instead of exchanging to a "similar" fund, I can also put that money in a MM account, and buy the same fund after 31 days, is that correct?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by ebotrd » Sun Sep 06, 2015 1:10 am

That's correct - you totally can. Here's the argument to put the $$ in a similar, but not substantially identical, fund:

Volatility of investment. In the real world, a tax loss harvester waiting 31 days to reinvest will see volatility in the investment. If the price of the investment goes up while the investor is on the sidelines she is disadvantaged; if the price goes down, she is advantaged. One might expect that over a long period of tax harvesting these volatility effects might wash out (if random) or perhaps, if there is a short term momentum effect, a slight advantage to the loss harvester over the long haul. This volatility of reinvestment risk can be mitigated if one immediately purchases a similar, but not substantially identical investment, but this comes with a higher degree of complexity especially if one is swapping fractional lots of the original fund.

That's from the Wiki at http://www.bogleheads.org/wiki/Tax_loss_harvesting

They also list several "substitute funds" in the same article.

BTW, just found this older TLH thread - best I've seen! (thanks again, livesoft).
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by jay22 » Mon Sep 07, 2015 9:45 am

Read this thread again. So, a wash sale can happen if I have the same fund that I am trying to TLH in my IRA/Spouse's IRA account? Or am I missing something here? :?:

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by House Blend » Mon Sep 07, 2015 11:02 am

jay22 wrote:Read this thread again. So, a wash sale can happen if I have the same fund that I am trying to TLH in my IRA/Spouse's IRA account?
Yes.

But to be more precise, simply owning the same fund in any of the IRAs is not a problem. It is having a purchase of that fund in the IRA (including dividend reinvestment) during the 61 day window created when you sell in taxable at a loss.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by packet » Mon Sep 07, 2015 11:04 am

jay22 wrote:Read this thread again. So, a wash sale can happen if I have the same fund that I am trying to TLH in my IRA/Spouse's IRA account? Or am I missing something here? :?:
Yes.
We know this for certain as the IRS has said so for traditional IRAs and Roth IRAs (including within spousal accounts).
The debate arises with 401k's, 403b's, and others.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Mon Sep 07, 2015 11:07 am

jay22 wrote:Read this thread again. So, a wash sale can happen if I have the same fund that I am trying to TLH in my IRA/Spouse's IRA account? Or am I missing something here? :?:
Yes. Read IRS Publication 550 about wash sales and everything else.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by jay22 » Mon Sep 07, 2015 11:13 am

Thanks! So, as long as those shares have not been purchased (in the IRAs) 61 days before I TLH, I should be good?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Mon Sep 07, 2015 11:21 am

jay22 wrote:Thanks! So, as long as those shares have not been purchased (in the IRAs) 61 days before I TLH, I should be good?
Nope, that's not quite the way it works. But if the last time substantially shares were purchased in the IRAs was 61 days (or even 30 days before the day you TLH) AND (note the word AND) you do not purchase substantially identical shares in the IRAs in the 30 days after the day you TLH, you should be good.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by jay22 » Mon Sep 07, 2015 11:39 am

Sounds good. Thanks!

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by ebotrd » Mon Sep 07, 2015 6:16 pm

Question on the whole "qualified dividend" thing -
(Once again livesoft's all over this in the TLH Distribution Timing thread.

So, (just to take an example I'm familiar with) dividends for VTIAX & VFWAX are paid quarterly in Mar, Jun, Sep, Dec.
The Wiki also tells us that you're slightly better off trying to sell your loser fund before the next dividend payment, and then holding your new tax lot of the substitute fund until after it's next dividend (holding at least 61 days to ensure it's a qualified dividend).

abaracadabra11 in the TLH Distribution Timing thread calculated the value of doing this would be around 15% of the dividend value (for those in 25% tax bracket). So, if your dividend tends to hover somewhere around $1000, that's $150 bucks. Your TLH move itself is hopefully worth much more, but this is a nice cherry on top if you can finesse it. And through the miracle of compound interest that will multiply many times over by the time...blah, blah.

Downsides?
I guess since this forces you to hold the new fund as long as 61 days (rather than just 31 days)...
1. you risk a bit more (prolonged) "tracking error" for your IPS.
2. you risk missing another better TLH opportunity to exchange back in to your original fund.

AN EXAMPLE (I'll try to liven it up a bit with a story line as this stuff can get a liiiiitle dry):

ASSUMPTIONS:
Assume VTIAX (referred to as "A") & VFWAX ("B") here only because I know they pay out dividends Mar, Jun, Sep, Dec - next one due around 9/22 I think, but the concept would work for any TLH.
Assume 25% tax bracket (28.8% with medicare).
Assume you're holding (for example) VTIAX tax lots with total losses of $18k.
Assume abaracadabra's correct that benefit of holding until achieving qualified dividend status is worth about 0.15 x [dividend amount], which in this case could be estimated at $100-$200.
Assume that, if nothing else, you can at least take full advantage of TLH over the the next several years through reduced tax burden on ordinary your ordinary income tax. Even if you consider you'll some day sell the funds that will now have a lower cost basis, you are fairly certain you'll be in a 15%-ish tax bracket when that day comes, so if you harvest $18k in losses you'll pocket almost $2500 (more assuming it's reinvested). (28.8% ordinary income tax rate - 15% LTCG eventually paid = 13.8% "tax arbitrage" benefit x $18k = $2484).

SCENARIO:
On 9/8 you exchange out of all your losing fund's tax lots (A), into substitute fund B (similar, but not "substantially identical" of course).

You've been reading bogleheads waaaayyyy too much, so you know you can't buy back A for 31 days (so that's 10/9 I guess).
You also know that if B has a dividend payment while you're holding it, you get some benefit by holding it 61 days total (so that's 11/2 I guess).
You read up on it and see that B will get a dividend during that 31 days (9/22 you think), so you know that means you probably ought to go ahead and hold 61 days total to achieve "qualified dividend status" on that.

You usually tune out any financial media hype to help "stay the course", but on 9/17 you're out with some friends and someone says "hey what do you think about that stock market crash today?".

You realize you B hasn't gotten it's dividend yet, but you can't buy back A yet.

You vaguely recall this may be an asterisk worth exploring.

You turn once more to bogleheads to empower yourself with truth and knowledge.

You think, "What would lifesoft do?".

You check on line that night and confirm it was indeed a RBD ("really bad day") for B (say $200k invested and it dropped 15% for a $30k loss). You decided this may be another nice TLH opportunity, so you watch how B is doing the next day up until around 4:30pm EST, and assuming no major gains (which could of course change things), you exchange B for C (another similar, but not "substantially identical" fund)!

Good move! You also find out if C will get a dividend 9/22 as well (before the 31 day mark), so you plan to just hold it for a total of 61 days more to ensure it's "qualified" to save a C-note or two on taxes.

But another wrinkle in the plan occurs. It's 10/2 (C already got a dividend of say, $1,000), but you inadvertently overhear that C had a RBD of it's own! (say $170k invested and dropped 15%). Still too early to buy back A.

"What would lifesoft do?".

You buy D. You didn't wait long enough for C's dividend to qualify, but that's small potatoes compared to this new TLH opportunity.

Wash, rinse, repeat. Each time your fund has a big drop, you can weigh whether it might be worth it to TLH again vs just do nothing (and if there's a dividend, wait for it to qualify). (Suggested substitutes were VTIAX-VFWAX-VMMXX).

What do you all think? I'm still a newbie - probably know just barely enough to be dangerous.
Last edited by ebotrd on Mon Sep 07, 2015 6:34 pm, edited 1 time in total.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Mon Sep 07, 2015 6:20 pm

ebotrd wrote:I guess since this forces you to hold the new fund as long as 3 months (rather than just 31 days)…
I stopped reading with this statement because 61 days is not "as long as 3 months". The personal holding period is not 60 days BEFORE the dividend nor is it 60 days AFTER the dividend. It is 61 days with the period of 121 days centered on the dividend day.

I read the rest: OK, what would livesoft do? Probably create a wash sale and fix it later.

Let me add this "something livesoft did": In the last week of August, livesoft noticed that some positions in VTI of livesoft had gone into the red. They were purchased back in January. Did livesoft sell? No! Instead livesoft bought several thousand shares of VTI in a tax-advantaged account. Those shares went up. Did livesoft hold? No! livesoft sold them for a nice gain. livesoft will get around to tax-loss harvesting the VTI in the taxable account at some point. It was better to make money quickly than to worry about tax-loss harvesting. livesoft did tax-loss harvest another fund and buy replacement shares, but they were not VTI.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by ebotrd » Mon Sep 07, 2015 6:36 pm

OK, I edited that out - it's max 61 days. I was thinking if the distribution came on like day 29 or 30, then the 61 day clock would start then, but I know that's not right now (was learning as I was writing that).

Oh, great point about priorities too -- my tax-advantaged space is only about 20% of total investments, so I try to keep tax-advantage full of bonds, REITs, maybe a bit of small cap if there's space. I thought that was the best strategy tax-wise.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by jay22 » Wed Sep 16, 2015 5:23 pm

BHs, what would be a substitute fund for VGTSX? Also, is it advisable to do TLH for short term loss, too?
Last edited by jay22 on Wed Sep 16, 2015 5:57 pm, edited 1 time in total.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Wed Sep 16, 2015 5:43 pm

jay22 wrote:BHs, what would be a substitute fund for VGTSX? Also, is it advisable to do TLH for short term gains, too?
Answers: VFWIX. No.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by packet » Wed Sep 16, 2015 5:54 pm

jay22 wrote:BHs, what would be a substitute fund for VGTSX? Also, is it advisable to do TLH for short term gains, too?
Tax LOSS harvesting and tax GAIN harvesting are two very different things.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by jay22 » Wed Sep 16, 2015 5:56 pm

packet wrote:
jay22 wrote:BHs, what would be a substitute fund for VGTSX? Also, is it advisable to do TLH for short term gains, too?
Tax Loss harvesting and tax gain harvesting are two very different things.

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Sorry, I meant short term loss. :oops:

Edited the post.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Wed Sep 16, 2015 5:57 pm

jay22 wrote:Sorry, I meant short term loss. :oops:
Of course. Always harvest losses if you can while they are as large as possible and before they become long-term losses.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by jay22 » Wed Sep 16, 2015 7:26 pm

Thanks Livesoft.

I just did my first ever TLH for around $2.4K. :D

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by jay22 » Wed Sep 16, 2015 10:02 pm

livesoft wrote:
jay22 wrote:BHs, what would be a substitute fund for VGTSX? Also, is it advisable to do TLH for short term gains, too?
Answers: VFWIX. No.
One more question - VGTSX and VFWIX are more or less the same fund. Does it make sense to switch back to VGTSX after 31 days? Wouldn't there be tax implications once I sell VFWIX and buy VGTSX now?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by packet » Thu Sep 17, 2015 7:39 am

jay22 wrote:
livesoft wrote:
jay22 wrote:BHs, what would be a substitute fund for VGTSX? Also, is it advisable to do TLH for short term gains, too?
Answers: VFWIX. No.
One more question - VGTSX and VFWIX are more or less the same fund. Does it make sense to switch back to VGTSX after 31 days? Wouldn't there be tax implications once I sell VFWIX and buy VGTSX now?
Totally up to you...
If VFWIX is up in 30 days and you go back to VGTSX, you'll owe short term capital gains tax on the increase (which will be offset by your recent TLH, thus potentially reducing it's benefit to income taxes).
If VFWIX is down in 30 days and you go back to VGTSX, you'll have another TLH.

Beware of Vanguard frequent trading policies for both funds, there may be fees and/or restrictions...
(EDIT: I just came across this.)

I'm a very simple sort of fella... so, I am prepared to hold forever either fund in a TLH pair. I don't want to be trading back and forth every 30 (or 60 or 90) days.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by jay22 » Thu Sep 17, 2015 9:18 am

I hear you, packet. Doesn't make any sense to pay short term taxes when you're trying to save taxes by doing TLH.

Also, is it 30 calendar days, or only the days when the market is open is counted?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by packet » Thu Sep 17, 2015 10:30 am

jay22 wrote:...Also, is it 30 calendar days, or only the days when the market is open is counted?
I'm pretty sure it's calendar days... tho I must admit, I've never given it thought... :)

Publication 550 states...
Pub 550 wrote:A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,

Acquire substantially identical stock or securities in a fully taxable trade,

Acquire a contract or option to buy substantially identical stock or securities, or

Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Roothy » Thu Sep 17, 2015 10:38 am

Given the new Vanguard policy on frequency of trading, that's one less thing to worry about: Vanguard's policy on rebuying the original TLH'd fund is the same as the IRS's (30 days).

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by randomizer » Sun Sep 20, 2015 4:09 pm

Can I TLH a fund by selling all of it even if I've only held it for a few (ie less than 30) days?

I recently bought total market for the first time about three weeks ago, it's down a few thousand now, and I'd like to harvest the loss by switching to an S&P 500 fund.

No other "substantially identical" funds to worry about in any of my accounts.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Sun Sep 20, 2015 4:11 pm

randomizer wrote:Can I TLH a fund by selling all of it even if I've only held it for a few (ie less than 30) days?

I recently bought total market for the first time about three weeks ago, it's down a few thousand now, and I'd like to harvest the loss by switching to an S&P 500 fund.

No other "substantially identical" funds to worry about in any of my accounts.
Definitely, yes.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by randomizer » Sun Sep 20, 2015 6:00 pm

livesoft wrote:
randomizer wrote:Can I TLH a fund by selling all of it even if I've only held it for a few (ie less than 30) days?
Definitely, yes.
Great, thanks. I've read a bunch of stuff (this and other threads here, the wiki, the fairmark.com guides) and want to make sure I really understand how this works, so here are the concrete details:
  • 8/27: First ever VTSAX purchase ($115k), currently down about $1.1k
  • 9/4: Regular VTSAX contribution ($0.5k), currently up $10
  • 9/18: Regular VTSAX contribution ($0.5k), currently up $0.02 (awww, yis)
If I sell all of these, I will have a capital loss of $1.1k and a capital gain $10.02. The wash sale rule will not apply because none of the shares I bought, even the ones I bought a couple of days ago, can be considered "replacement shares".

First question: as I am exchanging all at once, will Vanguard report the gain and loss separately for tax purposes (on the 1099-whatever-it-is), or will they report only the net result which is the loss of $1.1k - $10.02?

On the other hand, it I were to sell only the SpecID lot that has a loss (in this case, the 8/27 batch), then I would have a capital loss of $1.1k, but would I have a partial wash sale? Are the 9/4 and 9/18 batches considered replacement shares because they were purchased after the initial purchase on 8/27, or non-replacements because they were purchased before the sale? If it is a partial wash, then what exactly do the following mean?
  • "You are not allowed to claim the loss on your sale.": Does this mean that I can claim the loss only on the amount of $101k (initial/sold lot) - $1k (recent contributions)? How is this calculated? Or does it mean something else entirely?
  • "Your disallowed loss is added to the basis of the replacement stock.": Again, how much exactly would be added to the basis here?
  • "Your holding period for the replacement stock includes the holding period of the stock you sold.": I think this one, at least, is fairly clear; it means the holding period for the replacement stock would be considered to have started on 8/27. Is this right?
I think I want to sell all lots in any case, just to keep the number of funds I hold to a minimum, and because the gains in those later lots are negligible, so there's not a huge gain there that I would want/need to avoid realizing. But I do want to fully understand how this works.

On final question: is all this complexity going to cause my accountant to have a big headache? (Although in a sense, the more complicated my tax affairs, the better for him because he gets to charge me more.)

I guess a related question is: how do I document all of this so that he can prepare my taxes?

Anyway, thanks for helping. The info I learn here will help me decide how best to TLH both my VTSAX and VTIAX holdings, which are the two in my three-fund portfolio currently showing losses of greater than $1k.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Sun Sep 20, 2015 6:10 pm

I like your idea of selling all three lots. There will be no wash sale. As for your questions, can we wait until April 16, 2016 to answer them, because you will see how it all works out then?

If your accountant is TurboTax, there will be no additional cost for any of this.

BTW, there really is no complexity. Your mind is playing tricks on you.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Sun Sep 20, 2015 6:27 pm

Here is something fun that you can do:

On Monday, if the market does not go down, sell the 2 lots that were purchased in September at a gain. There will be a short-term gain. Vanguard will have the transaction on your 1099-B as a gain and it will all look "normal", right?

On Tuesday, sell the lot purchased in August. There will be a short-term loss. There are no replacement shares in the portfolio at all. Vanguard will have the transaction on your 1099-B as a loss and it will all look "normal", right?

Conceptually, doing the two sales on separate days may be easier to understand.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by dratkinson » Sun Sep 20, 2015 6:36 pm

livesoft wrote:
randomizer wrote:Can I TLH a fund by selling all of it even if I've only held it for a few (ie less than 30) days?

I recently bought total market for the first time about three weeks ago, it's down a few thousand now, and I'd like to harvest the loss by switching to an S&P 500 fund.

No other "substantially identical" funds to worry about in any of my accounts.
Definitely, yes.
The long answer. Ensure you sell all TSM. Why? TSM pays quarterly distributions... within next few days. Any unsold TSM will earn a distribution, resulting in replacement shares/wash sale and QDI/LTCG taxation/reporting issues. So for simplicity, sell everything before you earn the distribution.


Double-check TSM ex-dividend date. If your sell transaction executes before that date, then you avoid the distribution and taxation/reporting issues. If your sell transaction executes on or after that date, then you earn the distribution and taxation/reporting issues.

See: http://www.dummies.com/how-to/content/h ... dates.html
Ex-dividend date
...
Sale: Sell shares on or after the ex-dividend date, and you collect the declared dividend. Sell shares before this date, and you miss out on the payment.
...
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by randomizer » Sun Sep 20, 2015 7:14 pm

dratkinson wrote:The long answer. Ensure you sell all TSM. Why? TSM pays quarterly distributions... within next few days. Any unsold TSM will earn a distribution, resulting in replacement shares/wash sale and QDI/LTCG taxation/reporting issues. So for simplicity, sell everything before you earn the distribution.


Double-check TSM ex-dividend date. If your sell transaction executes before that date, then you avoid the distribution and taxation/reporting issues. If your sell transaction executes on or after that date, then you earn the distribution and taxation/reporting issues.
Ah, so it is more complicated than I thought.

I was hoping to side-step distribution-related wash sales by turning off automatic reinvestment (at the moment, I have it set up to just transfer dividend payouts to my savings account).

But as for selling before/after the ex-dividend date, that's more complicated. I'd only want to forego the dividend payout if the relative benefit of TLH is greater than the benefit from taking the dividends. I am not really sure how large the distribution will be, so it's hard to say. I'm still new to all this.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by packet » Sun Sep 20, 2015 7:26 pm

randomizer wrote:...I was hoping to side-step distribution-related wash sales by turning off automatic reinvestment ...
I do believe you have this correct.
By turning off automatic reinvestment, you are avoiding any purchases in the 30 day before sale window.
randomizer wrote:But as for selling before/after the ex-dividend date, that's more complicated. I'd only want to forego the dividend payout if the relative benefit of TLH is greater than the benefit from taking the dividends...
Good plan.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Sun Sep 20, 2015 7:46 pm

randomizer wrote:Ah, so it is more complicated than I thought.
I didn't mention the upcoming dividend because it is a red-herring in this case. You intended to complete the exchange well before the dividend would occur. You will get the dividend for the funds that you will be buying this week. You are not foregoing a dividend --- it will just be paid by a fund that you want to own instead. You do not want to get the dividend for the shares you currently own and want to unload them before you get the dividend.

In other words, it is not complicated at all.

I understand you have something else lurking in the wings, so get it done before that something else pays a dividend, too.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by randomizer » Sun Sep 20, 2015 10:18 pm

livesoft wrote:
randomizer wrote:Ah, so it is more complicated than I thought.
I didn't mention the upcoming dividend because it is a red-herring in this case. You intended to complete the exchange well before the dividend would occur. You will get the dividend for the funds that you will be buying this week. You are not foregoing a dividend --- it will just be paid by a fund that you want to own instead. You do not want to get the dividend for the shares you currently own and want to unload them before you get the dividend.

In other words, it is not complicated at all
I guess as long as VTSAX and VTIAX (or whatever other pair of funds happen to be involved) have the same or similar ex-divident dates then it really is simple. I haven't checked the dates yet, but I will.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by randomizer » Sun Sep 20, 2015 11:33 pm

randomizer wrote:I guess as long as VTSAX and VTIAX (or whatever other pair of funds happen to be involved) have the same or similar ex-divident dates then it really is simple. I haven't checked the dates yet, but I will.
And of course, they do... The two exchanges I'll likely do (VTSAX -> VFIAX and VTIAX -> VFWAX) involve funds that all distribute dividends quarterly, and all on the same day by the looks of it (before the end of this month, although I am not sure of the exact day).

So, this looks like a no-brainer, if things are still down close to the 4 PM market close tomorrow, I'll do the exchanges. Thanks once again for your help, livesoft, packet, dratkinson.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by JaySayms » Tue Sep 22, 2015 12:49 am

What do you guys and gals think of total world stock as a TLH partner for TSM + TISM? (Assumes of course that you are comfortable with that AA....)

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by randomizer » Tue Sep 22, 2015 2:26 am

randomizer wrote:
randomizer wrote:I guess as long as VTSAX and VTIAX (or whatever other pair of funds happen to be involved) have the same or similar ex-divident dates then it really is simple. I haven't checked the dates yet, but I will.
And of course, they do... The two exchanges I'll likely do (VTSAX -> VFIAX and VTIAX -> VFWAX) involve funds that all distribute dividends quarterly, and all on the same day by the looks of it (before the end of this month, although I am not sure of the exact day).
For a moment there I thought I might screw up. I looked on the wrong page and mistakenly thought that all these funds would have their distributions on the same day, a few days from now, but it turns out they don't.

VFIAX, for example, had September 17th as its "declaration date", and today (the 21st) is supposedly the "payable date".

VTSAX is going to have its declaration date on September 23rd, and its payable date presumably soon after.

So, it I were to exchange today (September 21st), the following could happen:
  • Sell VTSAX, too soon to get the distribution.
  • Buy VFIAX, too late to get the distribution that it had today.
I am not sure this is a bad thing. Let's compare what happens in this VTSAX-to-VFIAX scenario with what happens in a VTSAX-to-VLCAX scenario (VLCAX chosen because it has exactly the same dates as VTSAX).
  • Imagine VFIAX is trading at $10 per share and pays a dividend of $1 per share.
  • On payout, the price is adjusted to $9 per share.
  • Start with $1000 of VTSAX, say 100 shares at $10 each.
  • Sell all 100, and get $1000.
  • Buy 111.1 shares of VFIAX at $9 each (ie. $1000).
  • Watch as VTSAX pays a dividend of $1 per share, and its price gets adjusted to $9 (you miss out on these dividends).
In this scenario, you started with $1,000, ended with $1,000, and had no dividends or capital gains (in fact, you harvested a loss), and therefore did not incur the wrath of the tax gods. You sold high and bought low, which means you have 111.1 shares at the end, even though you only started with 100 and your overall holdings are still $1,000 in total.

Now let's look at VTSAX-to-VLCAX:
  • Start with $1000 of VTSAX, say 100 shares at $10 each.
  • Sell all 100, and get $1000.
  • Buy 100 shares of VLCAX for $1000.
  • Get a dividend of $1 per share ($10).
  • Price of both funds is adjusted down to $9/share
  • You now have 100 shares ($900 value) + $100 in dividends.
  • You owe capital gains tax on the dividends.
So, again, you started with $1,000 and ended with the same amount. But this time you have 100 shares instead of 111.1, and you owe some capital gains tax on the distribution amount of $100, so let's just handwave and say that you're going to lose about a third of that to taxes, leaving you with $900 + $65...

So, it appears that selling today would have worked out well. One thing I did notice, however, is the Vanguard UI doesn't necessarily help a lot because of the lag. I checked the "unrealized losses" view on these funds and it was showing info based on what looks like the last close of the market (ie. on Friday). Fast-forward a few hours later, after the Monday market close, and you see the new values for profit/loss, which might be sustantially different. I think the moral of the story here then is that you have to check the index value yourself independently and use that to inform your purchase and/or sale decisions.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by nalor511 » Tue Sep 22, 2015 3:50 am

Where are you able to check ex-dividend and payable dates in advance? I didn't see them on vg or morningstar but maybe I wasn't in the right place. Thank you

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Tue Sep 22, 2015 5:23 am

randomizer wrote: Now let's look at VTSAX-to-VLCAX:
[….]
So, again, you started with $1,000 and ended with the same amount. But this time you have 100 shares instead of 111.1, and you owe some capital gains tax on the distribution amount of $100, so let's just handwave and say that you're going to lose about a third of that to taxes, leaving you with $900 + $65...
A small quibble. One does not owe capital gains tax on dividends. There is no handwaving needed. Most folks would pay no where near 33% tax on dividends, but I suppose it is possible. For folks that do, they should try very hard to only get qualified dividends.

As you noted, if one had done nothing, they would have gotten a dividend with tax consequences, right? Only by knowledge of upcoming distribution dates and judicious timing would one have avoided a dividend.

And that is good advice to be forewarned that the Vanguard web site is not updated in a timely manner. (When is the VLCAX dividend again?)

(As an aside, I wonder why people like to collect dividends?)
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by randomizer » Tue Sep 22, 2015 10:33 am

nalor511 wrote:Where are you able to check ex-dividend and payable dates in advance? I didn't see them on vg or morningstar but maybe I wasn't in the right place. Thank you
This is the Vanguard page I found with the September 2015 distribution dates.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by jay22 » Wed Sep 23, 2015 8:16 am

I have done TLHing with for about 3K, but have some more losses that I could realize. Does it make sense to realize those losses now and write them off in the 2016 tax return, or should I wait till next year (when I might now be able to sell them at a loss)?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Wed Sep 23, 2015 8:20 am

jay22 wrote:I have done TLHing with for about 3K, but have some more losses that I could realize. Does it make sense to realize those losses now and write them off in the 2016 tax return, or should I wait till next year (when I might now be able to sell them at a loss)?
Does this "algorithm" help you decide? -> viewtopic.php?p=2610557#p2610557
It was meant to answer exactly that question (and many others).
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by jay22 » Wed Sep 23, 2015 8:59 am

livesoft wrote:
jay22 wrote:I have done TLHing with for about 3K, but have some more losses that I could realize. Does it make sense to realize those losses now and write them off in the 2016 tax return, or should I wait till next year (when I might now be able to sell them at a loss)?
Does this "algorithm" help you decide? -> viewtopic.php?p=2610557#p2610557
It was meant to answer exactly that question (and many others).
Are you talking about the $500 threshold from that post?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Wed Sep 23, 2015 8:28 pm

jay22 wrote:
livesoft wrote:
jay22 wrote:I have done TLHing with for about 3K, but have some more losses that I could realize. Does it make sense to realize those losses now and write them off in the 2016 tax return, or should I wait till next year (when I might now be able to sell them at a loss)?
Does this "algorithm" help you decide? -> viewtopic.php?p=2610557#p2610557
It was meant to answer exactly that question (and many others).
Are you talking about the $500 threshold from that post?
Yes, and the Thanksgiving thing, too. Don't wait until next year.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Roothy » Mon Sep 28, 2015 1:35 pm

Just thought I'd post a coda about my own TLH, that inspired my original post.

Thirty days ago from last Saturday, I moved all my VTSAX (total market) and VFIAX (S&P 500) into VLCAX (a large cap index). I moved all my VTIAX (international total market) into VFWAX (all world ex-US). A few days later, after another big market drop, I moved all the VLCAX into VTCLX (a lightly-tax-managed total stock index) and all the VFWAX into 88% VTMGX/12%VEMEX (two funds that together basically mimic VTIAX). There they have sat--earning a smallish dividend in the internationals (about $330 total) and a huge one in the total stock (about $1400).

If today's drop continues as expected, I'm going to complete the round trip: moving all my internationals back into VTIAX, and all my total stock (domestic) into VTSAX. I can do this because 30 days have come and gone, so I no longer risk a wash sale (and helpfully, Vanguard now allows electronic re-purchases after 30 days, too).

Why am I moving back?

1. The funds have dropped in value, allowing more tax loss harvesting.
2. I prefer those funds--though very weakly--so I might as well take the opportunity to move them back.
3. The two-fund portfolio is neater/more simple.

What is the penalty I face for doing so?

I know that I said I wasn't going to worry about the dividend issue... but I admit the fact that I will have to pay ordinary income rates for my dividends does give me pause. I calculate the cost of moving back after 30+ days, rather than waiting 60+ days* (at which point the dividends would be "qualfied" and therefore taxed at the lower, long-term capital gains rate) as follows:

Current marginal income tax rate (for me, 28%) minus LTCG tax rate (for me, 15%), multiplied by .70 (since only about 70%, on average, of dividends would ever count as qualified, anyway). For me, this means I'll be paying a penalty of about 30 bucks for the internationals to get them back into my preferred fund, and about a *hundred* and thirty (frown) to get my domestics back. I've decided that this price is worth paying both to get back in my preferred funds, and to eliminate the risk that if I wait until 60 days have passed, I will miss the opportunity to TLH on this move back.

Anyway, in case anyone wanted to know what the round trip looks like, this is what mine will.

* Incidentally, I'd have to actually wait longer than 60 days from the intial TLH--the 60 days for qualified dividends depends on how long you have owned the fund that pays the dividend--in other words, for me, VTCLX and VTMGX/VEMEX. Since those were my *second* fund moves, I'd have to wait until the beginning of November to sell in order to benefit from the qualification of (about 70% of) my dividends, which I'm just not willing to do at the risk of losing about $1000 in tax benefits.
Last edited by Roothy on Mon Sep 28, 2015 1:48 pm, edited 1 time in total.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Mon Sep 28, 2015 1:45 pm

Have we created a Monster? ;)
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