Tax Loss Harvesting

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AgentHoopla
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Tax Loss Harvesting

Postby AgentHoopla » Fri May 19, 2017 7:10 am

AgentHoopla wrote:According to the IRS:
Any additional losses can be deducted up to $3,000 per year against ordinary income, while losses in excess of that limit can be carried forward to future tax years to reduce capital gains or ordinary income until the balance of the losses are used up.

So what this means is, if I am understanding correctly. Is that if you harvested a tax loss of $30,000 it would take 10 years to deplete that "loss" on your tax returns.

If you used VTSAX (Primary) and VFIAX (Secondary) as your TLH pairs, you might run the risk of getting "stuck" in VFIAX if you are attempting to TLH at the wrong time and the market rebounds.

Judging by the returns in VTSAX (7.86) over 15 years versus VFIAX (7.35) , wouldnt it be better to not TLH at all? If the funds were to continue preforming at their current rate?

I am thinking about just letting it ride and forgetting about the TLH thing in general, what do you guys do?
Last edited by AgentHoopla on Fri May 19, 2017 7:13 am, edited 1 time in total.

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midareff
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Re: Tax Loss Harvesting

Postby midareff » Fri May 19, 2017 7:17 am

Just looking at the last ten years ...... VTSAX and VFIAX had (basically) a $400 difference at the end of ten years from a starting $10,000 investment assuming you were in the under performer 100% of the time, which you would not have been. At a 25% tax rate that seems to states harvesting $1600 in loss, one time, over that period would have been sufficient to recover any possible difference.

It also ignores other funds which may lose money (NAV) in a rising interest rate environment, such as TBM (Total Bond) or IT Tax-Ex..

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Doc
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Re: Tax Loss Harvesting

Postby Doc » Fri May 19, 2017 7:32 am

AgentHopla
It is helpful to the rest of us to use fund names. Many won't bother to look up symbols.

That said I try to park my replacement shares in a tax advantaged account using bond funds as needed to balance the trades. If this is not possible try to find something closer like another large value fund rather than a total market fund. You can also just reverse the original trade after 30 days. You are only at risk for different performance for a short time and you keep your tax loss.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

jebmke
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Re: Tax Loss Harvesting

Postby jebmke » Fri May 19, 2017 7:37 am

I take losses when I have them. No formal materiality threshold but I leave small losses behind. TLH is virtually costless and it has allowed me to rebalance without paying taxes and preserved headroom to do ROTH conversions after I retired.

IMO there is no compelling reason not to TLH significant losses.
When you discover that you are riding a dead horse, the best strategy is to dismount.

avalpert
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Re: Tax Loss Harvesting

Postby avalpert » Fri May 19, 2017 3:59 pm

Looking at relative past performance is a red herring - so let's drop it.

Yes, when you TLH you need to be willing to be in the second fund for the long term. If you are concerned that leaving a total market fund for an S&P 500 fund will throw off your allocation then instead TLH with both an S&P 500 fund and an extended market fund (like VEXMX in their market proportions).

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Doc
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Re: Tax Loss Harvesting

Postby Doc » Fri May 19, 2017 6:27 pm

avalpert wrote:Yes, when you TLH you need to be willing to be in the second fund for the long term.

Can you explain this please. I take a tax loss of $10k. In the next 30 days my replacement asset goes up by $1k. I sell it at a gain and as a result can only save $9k of my original loss to carry forward.

It seem to me that as long as the harvested loss in dollar terms is more than any reasonable expectation of the dollar gain in the replacement you win. The trick is to not try to book small tax losses unless you can use a tax advantaged account in which to buy your replacement.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

avalpert
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Re: Tax Loss Harvesting

Postby avalpert » Fri May 19, 2017 6:54 pm

Doc wrote:
avalpert wrote:Yes, when you TLH you need to be willing to be in the second fund for the long term.

Can you explain this please. I take a tax loss of $10k. In the next 30 days my replacement asset goes up by $1k. I sell it at a gain and as a result can only save $9k of my original loss to carry forward.

It seem to me that as long as the harvested loss in dollar terms is more than any reasonable expectation of the dollar gain in the replacement you win. The trick is to not try to book small tax losses unless you can use a tax advantaged account in which to buy your replacement.

Then you aren't taking advantage of the full value of TLH - which is fine if you aren't comfortable with the potential trade-of. If you are waiting to have losses big enough to guarantee they won't be gone in 30 days you will leave a lot of losses on the table and really rarely do it at all.

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Doc
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Re: Tax Loss Harvesting

Postby Doc » Sat May 20, 2017 5:58 am

avalpert wrote:Then you aren't taking advantage of the full value of TLH - which is fine if you aren't comfortable with the potential trade-of. If you are waiting to have losses big enough to guarantee they won't be gone in 30 days you will leave a lot of losses on the table and really rarely do it at all

OK. What kind of frequency are you experiencing and do you have a $ or % "criteria" on the size of a loss that will trigger a TLH?

Since I use taxable/tax advantaged trade pairs usually I don't have much experience with your idea. As an example I did a lot of TLH in first qtr last year with International funds and restricted my out of market time to a few minutes and that only in the hours when both US and European market were both open.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

avalpert
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Re: Tax Loss Harvesting

Postby avalpert » Sat May 20, 2017 10:15 am

Doc wrote:
avalpert wrote:Then you aren't taking advantage of the full value of TLH - which is fine if you aren't comfortable with the potential trade-of. If you are waiting to have losses big enough to guarantee they won't be gone in 30 days you will leave a lot of losses on the table and really rarely do it at all

OK. What kind of frequency are you experiencing and do you have a $ or % "criteria" on the size of a loss that will trigger a TLH?

I generally don't bother if the loss is less than 4 figures - but do if it is greater. Frequency is obviously market dependent - my cash flow is more variable then it used to be since I became an independent contractor often mid-five figures at a time which means losses on new lots can be large quicly, when I was salaried I would be investing monthly (usually low five figures) in my taxable account so could have lots in say emerging markets with big losses several times a year and others that will be up forever.

Since I use taxable/tax advantaged trade pairs usually I don't have much experience with your idea. As an example I did a lot of TLH in first qtr last year with International funds and restricted my out of market time to a few minutes and that only in the hours when both US and European market were both open.

I' have actually started doing a similar strategy now that I have the volume in both accounts to cover it. I will say sell VWO to TLH in a taxable account and by say VTI, sell VTI in my solo 401k and by IEMG - that way in 30 days I can move out of IEMG back into VWO with no wash sale or capital gains concerns. But most people who don't have sizable tax-advantaged accounts outside of a company 401k (where options are limited) may not have the luxury of these games.

jebmke
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Re: Tax Loss Harvesting

Postby jebmke » Sat May 20, 2017 10:23 am

I agree that you should always TLH to a holding you are willing to hold more or less forever. You may not get a chance to go back without negating most/all of the loss on the latest transaction. During 2008-09 I was swapping between TSM and 500+ext every 3-4 weeks on average. I would have been OK ending on either side of the swap. As it turned out, my last swap was in March 2009 back to TSM and that cycle was done. Those assets will unlikely ever been in play again.
When you discover that you are riding a dead horse, the best strategy is to dismount.


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