Tax Loss Harvesting - Is it worth it?

ChasingFIRE · Post by **ChasingFIRE** » Fri Dec 30, 2016 2:17 pm

Howdy Bogleheads,

I've been reading about Tax Loss Harvesting (TLH), and I'm curious to what extent people are doing it, and whether they find it worth it (in terms of payoff, difficulty, time, etc).

I first started hearing about TLH when reading about Betterment's TLH+ https://www.betterment.com/resources/re ... ite-paper/ technology. However, since I have investments in multiple places (401k, Roth, taxable vanguard accounts) there is potential for a wash sales, and thus I'd need to be careful using something like Betterment's TLH+.

I'm not posting this in "Help With Personal Investments" so mainly just curious what are people's thoughts on TLH, whether people are doing it or not, and any thoughts or opinions on Roboadvisors TLH like Betterments.

Is the tax-deferred benefit of TLH worth the extra complexity and hassle to keep an eye out for wash sales, etc?

Bacchus01 · Post by **Bacchus01** » Fri Dec 30, 2016 3:37 pm

Honestly, I do it whenever I have a reasonable loss, which is usually more than $1000.

I find the long term benefit to be worth the minimal complexity it adds.

livesoft · Post by **livesoft** » Fri Dec 30, 2016 3:43 pm

Here is the 2015 Roll Call of TLH thread with plenty of testimonials:
2015 TLH Roll Call thread

I think folks have discovered that the fear of the unknown about wash sales is way overblown. Wash sales are no big deal nowadays since brokers will track them for you.

Folks also find that selling all those automated monthly investments lots for losses really simplifies the presentation of lots in their online accounts. So TLHing is a way to simplify one's portfolio, too.

Another benefit is that it helps people from falling into the "Loss Aversion" behavioral finance trap.

And finally, it is psychologically beneficial to start each new year in January with no position in red since they have been tax-loss harvested away.

One doesn't have to wonder about tax costs when rebalancing because the accumulated losses will offset even short-term capital gains. Have you ever thought, "I should rebalance now, but it will cost me extra taxes because of ST cap gains", but then when you didn't, you wish you had? TLH prevents this kind of thinking.

The above are all in addition to the monetary benefits!

iceport · Post by **iceport** » Fri Dec 30, 2016 4:35 pm

ChasingFIRE wrote:I'm not posting this in "Help With Personal Investments" so mainly just curious what are people's thoughts on TLH, whether people are doing it or not, and any thoughts or opinions on Roboadvisors TLH like Betterments.

Is the tax-deferred benefit of TLH worth the extra complexity and hassle to keep an eye out for wash sales, etc?

Hi ChasingFIRE, and welcome.

You are wise to ask these questions. Most people don't, and just TLH reflexively. You have to remain focused on total after-tax returns. TLH is just an intermediate step along the way to finally spending (or gifting or passing on to heirs) the investment, and should be used with some planning. It's sometimes easy to forget that the lowered basis could partially offset other benefits of TLH.

Also, just as with other forms of tax-deferral, on the day you TLH you will probably not know exactly how much the strategy will ultimately benefit you. To some extent, that will be dependent on future tax rates and structures, and your own personal situation at that future point in time. Those are most definitely not known now with precision.

And those points ignore the hassles to implement TLH you noted.

I'm an advocate for TLH, but everyone should think things all the way through before harvesting.

iceport · Post by **iceport** » Fri Dec 30, 2016 4:42 pm

livesoft wrote:I think folks have discovered that the fear of the unknown about wash sales is way overblown. Wash sales are no big deal nowadays since brokers will track them for you.

It's clearly a mistake to blindly rely on brokers to identify wash sales properly. If you use multiple brokers to implement a TLH with a repurchase, neither broker will report a true wash sale. Additionally, depending on the algorithm used by the broker, they could report a false wash sale when there are no replacement shares left.

The fear of wash sales may be overblown, but the need to track them for yourself is often understated (as it was above).

*3!4!/5! · Post by *3!4!/5! » Fri Dec 30, 2016 4:50 pm

Tax Loss Harvesting is irrelevant to me. It's just an academic curiosity.

Random Walker · Post by **Random Walker** » Fri Dec 30, 2016 5:00 pm

From reading the Berkin et al papers on this site, I believe TLH done right can yield 0.5-0.7% per year. TLH needs to be done on an individual lot basis (HIFO I believe) and done throughout the year. FWIW, it was TLH that helped me decide to go the advisor route. I felt that over time TLH would just about cover the AUM fee. Someone needs to decide when the losses are big enough to warrant the costs of TLH. My advisor makes these decisions.

Dave

livesoft · Post by **livesoft** » Fri Dec 30, 2016 5:13 pm

@iceport, yes, one should keep track of all transactions in one's accounts for many purposes including tax-loss harvesting. And that does include wash sales and where the disallowed loss ends up.

Random Walker wrote:Someone needs to decide when the losses are big enough to warrant the costs of TLH.

If one is doing their own tax-loss harvesting without paying an advisor, what are the costs of TLH?

Maybe some people can chime in with how much it cost them to tax-loss harvest?

Lieutenant.Columbo · Post by **Lieutenant.Columbo** » Fri Dec 30, 2016 5:20 pm

livesoft wrote:I think folks have discovered that the fear of the unknown about wash sales is way overblown. Wash sales are no big deal nowadays since brokers will track them for you.

Folks also find that selling all those automated monthly investments lots for losses really simplifies the presentation of lots in their online accounts. So TLHing is a way to simplify one's portfolio, too.

Another benefit is that it helps people from falling into the "Loss Aversion" behavioral finance trap.

And finally, it is psychologically beneficial to start each new year in January with no position in red since they have been tax-loss harvested away.

One doesn't have to wonder about tax costs when rebalancing because the accumulated losses will offset even short-term capital gains. Have you ever thought, "I should rebalance now, but it will cost me extra taxes because of ST cap gains", but then when you didn't, you wish you had? TLH prevents this kind of thinking.

The above are all in addition to the monetary benefits!

livesoft,
1. could you describe how/when(how often)/where in Vanguard you search for losses that you could harvest?
2. in what way does Vanguard track/prevent wash sales?
3. can one harvest a loss in one year IF the shares were purchased on a different previous year?
thank you

kiddoc · Post by **kiddoc** » Fri Dec 30, 2016 5:23 pm

livesoft wrote:
Random Walker wrote:Someone needs to decide when the losses are big enough to warrant the costs of TLH.
If one is doing their own tax-loss harvesting without paying an advisor, what are the costs of TLH?

+1

Costs of TLH?

FelixTheCat · Post by **FelixTheCat** » Fri Dec 30, 2016 5:24 pm

My reason for TLH is to minimize my taxes. Is it worth it? It depends on how much you are going to benefit.

iceport · Post by **iceport** » Fri Dec 30, 2016 5:26 pm

livesoft wrote:
Random Walker wrote:Someone needs to decide when the losses are big enough to warrant the costs of TLH.
If one is doing their own tax-loss harvesting without paying an advisor, what are the costs of TLH?

Maybe some people can chime in with how much it cost them to tax-loss harvest?

I can't speak to any monetary costs, but I have been sitting on some emerging markets losses for some time now, and I haven't harvested because I don't have a substitute fund available that I'd want to hold permanently. Given a large enough loss, I'd bite the bullet — i.e. take the loss, and buy the imperfect substitute. So far, the loss just hasn't seemed large enough to do that. This is purely a subjective analysis.

livesoft · Post by **livesoft** » Fri Dec 30, 2016 5:26 pm

Lieutenant.Columbo wrote:livesoft,
1. could you describe how/when/where in Vanguard you search for losses that you could harvest?
2. in what way does Vanguard track/prevent wash sales?
3. can one harvest loss on one year when the shares were purchased on a different previous year?
thank you

Thanks for asking. Answers to questions 1 and 2 are described in full glory in this thread: TLH documented. I think in that thread there are "twenty-seven 8 x 10 colored glossy photographs with circles and arrows and a paragraph on the back of each one explainin' what each one was, to be used" in a future post.

The answer to number 3 is Yes.

kiddoc · Post by **kiddoc** » Fri Dec 30, 2016 5:29 pm

Lieutenant.Columbo wrote: 1. could you describe how/when/where in Vanguard you search for losses that you could harvest?
2. in what way does Vanguard track/prevent wash sales?
3. can one harvest a loss in one year IF the shares were purchased on a different previous year?
thank you

I am not livesoft but will take a shot:

1- Look under cost basis --> unrealized gains and losses. It should list all your holdings with short and long term profits and losses tabulated. Red= loss. Green =profit.

2- Slight limitation: Vanguard can only track wash sales if all the sales are in vanguard accounts and they are all consolidated under one username. When you attempt a wash sale in such a situation, an alert will come up. If you still go ahead with it, Vanguard will calculate the disallowed loss and add it to the cost basis.

3- Yes. I try to harvest losses when they are short term rather than >1 year old but will have no problem harvesting either if available.

dratkinson · Post by **dratkinson** » Fri Dec 30, 2016 5:40 pm

Yes, TLHing can be worth the effort.

I recently used a small TLH opportunity to more quickly rebalance into bonds. Rebalancing was desired. Tax-free rebalancing was an opportunity.

Had it not of been for the rebalancing opportunity, I would not have TLHed for such a small amount. Otherwise, my TLH threshold seems to be ~$1K.

ChasingFIRE · Post by **ChasingFIRE** » Fri Dec 30, 2016 7:12 pm

iceport wrote: Hi ChasingFIRE, and welcome.

Thanks iceport for the warm welcome, and I'm quite impressed by the amount of responses in such a short time!

ChasingFIRE · Post by **ChasingFIRE** » Fri Dec 30, 2016 7:21 pm

A few followup questions:

1. Thoughts on using a Roboadvisor with TLH like Betterment's? I think it might be a bit more effective than doing it manually, but you still need to pay attention to wash sales and track all your accounts across different brokers (company 401k and taxable investments with different companies).

2. How do you choose when to TLH? Just the end of the year? Or is there a specific reasoning for when?

livesoft · Post by **livesoft** » Fri Dec 30, 2016 7:41 pm

ChasingFIRE wrote:2. How do you choose when to TLH? Just the end of the year? Or is there a specific reasoning for when?

Everybody might have a different trigger point. I presented an algorithm with trigger points in this previous post:
viewtopic.php?p=2610557#p2610557

larryswedroe · Post by **larryswedroe** » Fri Dec 30, 2016 7:54 pm

Academic curiousity? Have to be kidding. There are clear and demonstrable benefits from doing this right, especially in individual munis where the benefit is PERMANENT because there is no tax on the new bonds you buy at higher rates and hold to maturity. Also the ability to offset the first $3000 in income is important.
Larry

1210sda · Post by **1210sda** » Fri Dec 30, 2016 8:04 pm

Haven't been able to experience TLH. I am using the 3 fund portfolio, with Total Bond Market in tax advantaged accounts and Total Stock Market and Total International in my taxable accounts.

Since I am in the withdrawal stage, I have funds to which I'm no longer adding. I began investing long enough ago that my basis is low. I currently don't have the opportunity to TLH. Perhaps I should have been paying closer attention to this in the earlier stages when there might have been an opportunity to so. I just wasn't aware that it existed.

So Chasing FIRE, I don't really know if it's worth it.

1210

*3!4!/5! · Post by *3!4!/5! » Fri Dec 30, 2016 8:44 pm

*3!4!/5! wrote:Tax Loss Harvesting is irrelevant to me. It's just an academic curiosity.

Tax Sheltered Investing is better.

grabiner · Post by **grabiner** » Fri Dec 30, 2016 10:23 pm

Every year since 2008, I have taken $3000 off my taxable income, which saves me $840 in the 28% bracket, plus state tax in those years I was an MD resident. (I lived in NJ for three years; NJ does not allow capital loss carryovers, only deductions against gains in the same year.) I still have large carryovers, including many sales since 2008, most recently in February 2016.

And there was a bigger savings in 2013, when I actually needed to sell some stock. I bought a condo, and sold stock for the down payment. With the stock market at a peak, all my stock had a capital gain, and that would have even been the case if I hadn't harvested losses. But I had enough losses to offset the gains, so I paid no federal tax on capital gains and took the usual $3000 loss.

Lieutenant.Columbo · Post by **Lieutenant.Columbo** » Fri Dec 30, 2016 10:45 pm

grabiner wrote:Every year since 2008, I have taken $3000 off my taxable income, which saves me $840 in the 28% bracket, plus state tax in those years I was an MD resident. (I lived in NJ for three years; NJ does not allow capital loss carryovers, only deductions against gains in the same year.) I still have large carryovers, including many sales since 2008, most recently in February 2016.

And there was a bigger savings in 2013, when I actually needed to sell some stock. I bought a condo, and sold stock for the down payment. With the stock market at a peak, all my stock had a capital gain, and that would have even been the case if I hadn't harvested losses. But I had enough losses to offset the gains, so I paid no federal tax on capital gains and took the usual $3000 loss.

grabiner,
1. Do the carryovers mean that some years you've actually harvested more than $3000, and that the excess above $3000 was actually applied towards a subsequent year's taxes (but not for the year you realized the loss), is this correct?
2. what method/frequency do you use to discover/execute the loss?
thank you

grabiner · Post by **grabiner** » Fri Dec 30, 2016 10:51 pm

Lieutenant.Columbo wrote:
grabiner wrote:Every year since 2008, I have taken $3000 off my taxable income, which saves me $840 in the 28% bracket, plus state tax in those years I was an MD resident. (I lived in NJ for three years; NJ does not allow capital loss carryovers, only deductions against gains in the same year.) I still have large carryovers, including many sales since 2008, most recently in February 2016.

And there was a bigger savings in 2013, when I actually needed to sell some stock. I bought a condo, and sold stock for the down payment. With the stock market at a peak, all my stock had a capital gain, and that would have even been the case if I hadn't harvested losses. But I had enough losses to offset the gains, so I paid no federal tax on capital gains and took the usual $3000 loss.
grabiner,
1. Do the carryovers mean that some years you've actually harvested more than $3000, and that the excess above $3000 was actually applied towards a subsequent year's taxes (but not for the year you realized the loss), is this correct?

I harvested far more than $3000 in 2008; I have a large taxable portfolio, and it lost more than half its value in the 2008-2009 crash.

2. what method/frequency do you use to discover/execute the loss?

Usually, I look for a loss of at least 10%, since I don't get that much benefit from losses any more, and have trading costs if I harvest losses from ETFs. I have also sold for small losses when I was changing funds anyway.

dratkinson · Post by **dratkinson** » Fri Dec 30, 2016 11:02 pm

ChasingFIRE wrote:...
2. How do you choose when to TLH? Just the end of the year? Or is there a specific reasoning for when?

The best time to TLH is when you have the loss. Wait too long and the loss will be replaced by a gain.

MossySF · Post by **MossySF** » Fri Dec 30, 2016 11:09 pm

I remembered to TLH just in time to get my transactions done on 12/30. It'll cost me an extra time to type in all the transactions into TaxAct. But I type fast and I consider saving probably $2000 in taxes to be worth my time.

EDIT: I see TaxAct has a CSV import option. I'll try that this coming year. Even if I have to type it in by hand, a spreadsheet is still way faster than a GUI.

Lieutenant.Columbo · Post by **Lieutenant.Columbo** » Fri Dec 30, 2016 11:29 pm

livesoft wrote:
ChasingFIRE wrote:2. How do you choose when to TLH? Just the end of the year? Or is there a specific reasoning for when?
Everybody might have a different trigger point. I presented an algorithm with trigger points in this previous post:
viewtopic.php?p=2610557#p2610557

Thank you, livesoft,
I really wish there was a way to BH-bookmark that algorithm.
Questions:
1. If one can only use $3000/yr in loses, what's the big deal with finding similar but not identical pairs of funds? Even if (worst case scenario) all $3000 in realized loses came from the same fund (say a US stock fund) what's so wrong (as far as Asset Allocation) with buying $3000 worth of an Ex-US stock fund or bon fund? Or if you sell $3000 worth of US Small Cap stocks and then buy Large Cap US stocks? In a mature portfolio, $3000 worth of Asset Allocation disruption shouldn't be a large % of AA disruption. Investing the $3000 in any of your other funds seems simpler yet still adequate compared to owning two pairs of similar but not identical funds in each category one wishes to invest in. What am I missing?
2. is it best to set each fund on "no reinvestment of dividends/gains" in order to help avoid wash sales?
Thank you!

Bacchus01 · Post by **Bacchus01** » Fri Dec 30, 2016 11:34 pm

The $3k per year is significant enough when you are in the top tax bracket and a high state tax state.

It more than pays for the maybe 1 hour a year that I spend on it.

I usually look for significant down days in the market. The next day, if it's trending down again, I TLH.

I have about $20K banked yet to Claim tax deductions in future years, and meanwhile all of the positions have recovered well above the TLH level in the predominantly equivalent funds.

paisano · Post by **paisano** » Fri Dec 30, 2016 11:40 pm

Both Wealthfront and Betterment recently added tracking of external accounts. I expect they will proceed to use that information to implement automated wash sale avoidance. This could create interesting feedback loops if more than one account is trying to implement TLH with the same sets of securities.

tsutsugamushi · Post by **tsutsugamushi** » Sat Dec 31, 2016 8:34 am

Lieutenant.Columbo wrote: 1. If one can only use $3000/yr in loses, what's the big deal with finding similar but not identical pairs of funds? Even if (worst case scenario) all $3000 in realized loses came from the same fund (say a US stock fund) what's so wrong (as far as Asset Allocation) with buying $3000 worth of an Ex-US stock fund or bon fund? Or if you sell $3000 worth of US Small Cap stocks and then buy Large Cap US stocks? In a mature portfolio, $3000 worth of Asset Allocation disruption shouldn't be a large % of AA disruption. Investing the $3000 in any of your other funds seems simpler yet still adequate compared to owning two pairs of similar but not identical funds in each category one wishes to invest in. What am I missing?

It's 3000 worth of losses, not 3000 worth of shares. So if you're harvesting $3000 in losses on a holding with a 5% loss, that's $57,000 in replacement shares you need to buy.

Also, you can only deduct $3000 from income in a single year, but losses can also be used to offset capital gains or carried over to future years.

Barefootgirl · Post by **Barefootgirl** » Sat Dec 31, 2016 8:46 am

A few followup questions:

1. Thoughts on using a Roboadvisor with TLH like Betterment's? I think it might be a bit more effective than doing it manually, but you still need to pay attention to wash sales and track all your accounts across different brokers (company 401k and taxable investments with different companies).

2. How do you choose when to TLH? Just the end of the year? Or is there a specific reasoning for when?

I have been rolling the very same questions around in my head - hoping to flesh them out, except I do see the value (tongue in cheek here) to taking the loss when it occurs...

livesoft · Post by **livesoft** » Sat Dec 31, 2016 10:31 am

Lieutenant.Columbo wrote:I really wish there was a way to BH-bookmark that algorithm.
In your browser menu bar, click on "Bookmark this page." Simple.
Questions:`
1. If one can only use $3000/yr in loses, what's the big ….
Already answered in previous post.

2. is it best to set each fund on "no reinvestment of dividends/gains" in order to help avoid wash sales?
Yes, many people think so. See also: https://www.bogleheads.org/wiki/Reinves ... le_account
Thank you!

tpm871 · Post by **tpm871** » Sat Dec 31, 2016 2:14 pm

I did tax loss harvesting for some emerging markets shares mid-year. Besides taking the loss for tax purposes, it allowed me to shift shares from taxable to tax deferred accounts. I had wanted to shift as well, since dividends on EM tend to be less favorable tax-wise (more unqualified dividends in comparison to other investments).

The main risk is that you need to wait to repurchase shares to avoid a wash sale. That can work for you or against you, depending on if there's a drop or gain in that waiting period.

This past week I actually prepared for future TLH. I had some investments in small cap value in my tax deferred acount which had done well this year. I sold shares in my tax deferred account and bought an equal number of shares in my taxable account. From an asset allocation perspective, this was a neutral event because I have the same amount invested in my portfolio. But from a tax perspective, I now have a high cost basis on the shares in my taxable account that could be tax loss harvested in 2017. I suspect that we'll see a fair amount of volatility in the market in 2017, so getting this high basis near the market high seemed like the thing to do.

grabiner · Post by **grabiner** » Sat Dec 31, 2016 2:53 pm

tpm871 wrote:I did tax loss harvesting for some emerging markets shares mid-year. Besides taking the loss for tax purposes, it allowed me to shift shares from taxable to tax deferred accounts. I had wanted to shift as well, since dividends on EM tend to be less favorable tax-wise (more unqualified dividends in comparison to other investments).

The main risk is that you need to wait to repurchase shares to avoid a wash sale. That can work for you or against you, depending on if there's a drop or gain in that waiting period.

You can avoid that by buying a replacement fund which is not substantially identical. It doesn't even have to be similar; as long as it is in the same asset class, it will participate in the same market rises and falls. (However, if you hold the replacement fund in your taxable account, you have to be willing to continue to hold it if the market rises, since it will become expensive to sell. When I hold A and B in my taxable account, I often harvest a loss by selling some of my A to buy B, and then, 31 days later, if I have a loss in B, selling B to buy A. If I have a gain in B, I am overweighted in B, but my new money, and the dividends from B, can go to A to move me back into balance.)

Lieutenant.Columbo · Post by **Lieutenant.Columbo** » Sat Dec 31, 2016 3:42 pm

tsutsugamushi wrote:
Lieutenant.Columbo wrote: 1. If one can only use $3000/yr in loses, what's the big deal with finding similar but not identical pairs of funds? Even if (worst case scenario) all $3000 in realized loses came from the same fund (say a US stock fund) what's so wrong (as far as Asset Allocation) with buying $3000 worth of an Ex-US stock fund or bon fund? Or if you sell $3000 worth of US Small Cap stocks and then buy Large Cap US stocks? In a mature portfolio, $3000 worth of Asset Allocation disruption shouldn't be a large % of AA disruption. Investing the $3000 in any of your other funds seems simpler yet still adequate compared to owning two pairs of similar but not identical funds in each category one wishes to invest in. What am I missing?
It's 3000 worth of losses, not 3000 worth of shares. So if you're harvesting $3000 in losses on a holding with a 5% loss, that's $57,000 in replacement shares you need to buy.

Also, you can only deduct $3000 from income in a single year, but losses can also be used to offset capital gains or carried over to future years.

I understand Now!
What if I still decided to sell at loss from Fund A US Stocks and bought on the same day Fund B Ex-US stocks? Do the "no-purchases in the 30 days prior to or in the 30 days after The Purchase" rule applies to this case?
Thank you.

island · Post by **island** » Sat Dec 31, 2016 3:43 pm

I tax lost harvested earlier this year to reduce the amount of American Funds I have in a taxable account purchased in the 1990's before I knew anything about TLH, expenses, etc. I used the $ to purchase more VTSAX.

So for me TLH is worth it to get rid of some funds I don't want that would normally be too pricy tax-wise to just liquidate entirely.

Will see if I still feel the same way when it comes time to do my taxes because I have no clue how it works to enter that info.

I sold a bunch of individual lots, with many different purchase prices/dates for three AF funds.
No idea if need to enter all as seperate transactions or can lump by fund or company since all TLHed on the same day.

They were all purchased before fund companies had to keep track of cost basis so i won't be getting any assistance there.

grabiner · Post by **grabiner** » Sat Dec 31, 2016 4:26 pm

island wrote:I sold a bunch of individual lots, with many different purchase prices/dates for three AF funds.
No idea if need to enter all as seperate transactions or can lump by fund or company since all TLHed on the same day.

They were all purchased before fund companies had to keep track of cost basis so i won't be getting any assistance there.

You'll have to check your own records for the basis, but you can lump multiple purchases together with the date "Various" on the Form 8949 when you sell, as long as they are the same security and all go onto the same part of Form 8949. In your case, this will mean one entry for each fund, as your shares are all long-term and non-covered (unless you reinvested dividends recently; you may then have some short-term or covered shares, which would go onto a different part or copy of Form 8949).

9-5 Suited · Post by **9-5 Suited** » Sat Dec 31, 2016 4:39 pm

A theoretical question - if an investor plans on spending his entire taxable investment portfolio during his lifetime and anticipates always being in the 15% cap gain bracket, is there a realized benefit to TLH? Seems like there would not be because all locked in losses create equivalently large gains later on due to lowered basis.

livesoft · Post by **livesoft** » Sat Dec 31, 2016 4:43 pm

9-5 Suited wrote:A theoretical question - if an investor plans on spending his entire taxable investment portfolio during his lifetime and anticipates always being in the 15% cap gain bracket, is there a realized benefit to TLH? Seems like there would not be because all locked in losses create equivalently large gains later on due to lowered basis.

TLHing would allow you to time shift income which might be beneficial in some years. It would also allow you to rebalance out of positions with short-term capital gains and thus make it look like a short-term cap gain (taxed!) became a long-term cap gain (not taxed!).

Lieutenant.Columbo · Post by **Lieutenant.Columbo** » Sat Dec 31, 2016 4:55 pm

livesoft wrote:TLHing would allow you to time shift income which might be beneficial in some years. It would also allow you to rebalance out of positions with short-term capital gains and thus make it look like a short-term cap gain (taxed!) became a long-term cap gain (not taxed!).

livesoft,
1. what does time shifting income involve?
2. why did you specifically refer to short-term and not to long-term taxed capital gains? Was it because of the premise of "always being in the 15% cap gain bracket"?
3. would YOU rebalance out of positions with short-term capital gains before you had realized or carried over tax losses beforehand?
Thanks

triceratop · Post by **triceratop** » Sat Dec 31, 2016 4:58 pm

9-5 Suited wrote:A theoretical question - if an investor plans on spending his entire taxable investment portfolio during his lifetime and anticipates always being in the 15% cap gain bracket, is there a realized benefit to TLH? Seems like there would not be because all locked in losses create equivalently large gains later on due to lowered basis.

Building on the point made by livesoft that you are time shifting income: suppose I save an extra $1 in tax now due to harvesting losses and invest that for 40 years. When I sell, I'll need to pay that $1 in tax back -- but if my return on the $1 at least kept up with inflation, I have saved money. It truly is meaningful when people point out that tax loss harvesting is an interest free loan from the IRS.

9-5 Suited · Post by **9-5 Suited** » Sat Dec 31, 2016 5:01 pm

livesoft wrote:
9-5 Suited wrote:A theoretical question - if an investor plans on spending his entire taxable investment portfolio during his lifetime and anticipates always being in the 15% cap gain bracket, is there a realized benefit to TLH? Seems like there would not be because all locked in losses create equivalently large gains later on due to lowered basis.
TLHing would allow you to time shift income which might be beneficial in some years. It would also allow you to rebalance out of positions with short-term capital gains and thus make it look like a short-term cap gain (taxed!) became a long-term cap gain (not taxed!).

Good points. And there should also be some time value to the deferrals. If I reduce my current taxes by $X and in exchange my future tax bill is higher by $X I will most likely come out ahead in real terms, right?

9-5 Suited · Post by **9-5 Suited** » Sat Dec 31, 2016 5:04 pm

triceratop wrote:
9-5 Suited wrote:A theoretical question - if an investor plans on spending his entire taxable investment portfolio during his lifetime and anticipates always being in the 15% cap gain bracket, is there a realized benefit to TLH? Seems like there would not be because all locked in losses create equivalently large gains later on due to lowered basis.
Building on the point made by livesoft that you are time shifting income: suppose I save an extra $1 in tax now due to harvesting losses and invest that for 40 years. When I sell, I'll need to pay that $1 in tax back -- but if my return on the $1 at least kept up with inflation, I have saved money.

Does the return on the investment even factor in? The time value savings on the $1 are independent of investment performance which would be the same with or without TLH.

Doc · Post by **Doc** » Sat Dec 31, 2016 5:09 pm

9-5 Suited wrote:A theoretical question - if an investor plans on spending his entire taxable investment portfolio during his lifetime and anticipates always being in the 15% cap gain bracket, is there a realized benefit to TLH? Seems like there would not be because all locked in losses create equivalently large gains later on due to lowered basis.

Because of the Social Security phase out provisions in the IRS code that 15% bracket could mean your marginal tax rate is 27.75% (85% of you SS could be taxed for each additional dollar of ordinary income above some floor).

It gets very complicated.

As I understand the problem, some time in the past when congress decided that some part of SS should be taxed above a "floor" they forgot to adjust that floor for inflation.

Take the TLH whenever you can. You still get $3k per year as a credit against ordinary income for capital loss carry forwards.

island · Post by **island** » Sat Dec 31, 2016 5:10 pm

grabiner wrote:
island wrote:I sold a bunch of individual lots, with many different purchase prices/dates for three AF funds.
No idea if need to enter all as seperate transactions or can lump by fund or company since all TLHed on the same day.

They were all purchased before fund companies had to keep track of cost basis so i won't be getting any assistance there.
You'll have to check your own records for the basis, but you can lump multiple purchases together with the date "Various" on the Form 8949 when you sell, as long as they are the same security and all go onto the same part of Form 8949. In your case, this will mean one entry for each fund, as your shares are all long-term and non-covered (unless you reinvested dividends recently; you may then have some short-term or covered shares, which would go onto a different part or copy of Form 8949).

Thank you grabiner! This is very helpful info.

So happy to hear can lump sum purchase dates for each fund.
Will start reviewing 8949 to prepare. Definitely will not wait until last minute to do my taxes this year.
I kept good records of the lots sold and I think I have basis locked down, just more worried about doing it correctly on the tax forms.

You're right, all non-covered and long term. I stopped reinvesting divs and cap gains a few years ago based on the good advice of Livesoft.

Thanks again. I wouldn't have know about TLH to begin with if not for the great community here at Bogleheadland.

Earl Lemongrab · Post by **Earl Lemongrab** » Sun Jan 01, 2017 6:07 pm

iceport wrote:Maybe some people can chime in with how much it cost them to tax-loss harvest?

I can't speak to any monetary costs, but I have been sitting on some emerging markets losses for some time now, and I haven't harvested because I don't have a substitute fund available that I'd want to hold permanently. [/quote]
There's a way around that. Sell fixed-income to buy the replacement fund in tax-advantaged and go to cash in taxable. After the exclusion period, sell the unwanted fund to buy bonds and buy back the original in taxable. Only slightly more work.

grabiner · Post by **grabiner** » Sun Jan 01, 2017 7:12 pm

livesoft wrote:Maybe some people can chime in with how much it cost them to tax-loss harvest?

My usual tax-loss harvesting strategy is to sell A and buy B when I already hold both funds and want to take a loss in A. If the market goes up over the next 31 days, I will have an excess in B, but I can make up for that by making later new investments in B. Therefore, this is free when both A and B are free of trading costs, and almost free when trading very liquid ETFs (VEA, Developed Markets ETF, which is usually at a 1-cent spread).

However, I have made a lot of harvests which do have trading costs. When I sell VSS (FTSE All-World Ex-US Small-Cap ETF) and buy it back, I expect to lose about 0.1% to the spread, and it used to be 0.2%; that's a cost of $10-20 to sell a single block of 100 shares for $10,000. And back in 2008, I harvested losses in Emerging Markets Index when it still had 0.25% purchase and 0.25% redemption fees, which was a 0.5% cost on the round trip.

And in 2008, I was selling so much that I wasn't able to take advantage of the A-B strategy; Total Stock Market is my only taxable US stock fund, and selling almost all of the fund to buy more of one of the international funds I hold in taxable would have thrown off my asset allocation. Therefore, I left the money in a money-market fund for 31 days, and moved money from bonds to US stock in my retirement account to make up the difference in stock allocation. With bonds yielding about 2% more than cash, that's a cost of 0.09% in lost returns.

iceport · Post by **iceport** » Sun Jan 01, 2017 10:20 pm

Earl Lemongrab wrote:
iceport wrote:
livesoft wrote:Maybe some people can chime in with how much it cost them to tax-loss harvest?
I can't speak to any monetary costs, but I have been sitting on some emerging markets losses for some time now, and I haven't harvested because I don't have a substitute fund available that I'd want to hold permanently.
There's a way around that. Sell fixed-income to buy the replacement fund in tax-advantaged and go to cash in taxable. After the exclusion period, sell the unwanted fund to buy bonds and buy back the original in taxable. Only slightly more work.

That's an excellent idea that had never occurred to me! Thank you Earl Lemongrab!

I do have only one bond position — added as an overlap for re-balancing across account types — in only one account with access to a substitute EM fund. So the ability to TLH as you outlined is inadvertent, but it's there nonetheless, and I'm embarrassed for not spotting it.

Barefootgirl · Post by **Barefootgirl** » Mon Jan 02, 2017 8:14 am

Both Wealthfront and Betterment recently added tracking of external accounts. I expect they will proceed to use that information to implement automated wash sale avoidance. This could create interesting feedback loops if more than one account is trying to implement TLH with the same sets of securities.

Depending on the details, this could tip the balance in favor of using these services for TLH. I need to look into this. Thanks for mentioning it.

ff4930 · Post by **ff4930** » Mon Jan 02, 2017 1:11 pm

Can someone speak of TLH upon tax return season? How does this work? Is it a painful process or is just a figure in a textbox on our tax returns?