TLH (tax loss harvesting) and ESPP. And betterment real?

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international001
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TLH (tax loss harvesting) and ESPP. And betterment real?

Post by international001 » Tue Jun 05, 2018 6:09 pm

Hi,

If I understand right, the only kind of TLH is that with long-term loss offsetting income or short-term gains.

I usually do qualifying dispositions of ESPP, so I get a bunch of long-term capital gains each year. Is there a way of getting benefit of TLH?

Also, does this graph really makes sense? You can only use $3000 for TLH each year (and likeky to get the real benefits by multiplying it for [tax_bracket -15%). So it would seem the more money you have in your portfolio, the percentage return should be lower.

https://www.betterment.com/tax-loss-harvesting/

PFInterest
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by PFInterest » Tue Jun 05, 2018 9:26 pm

simply, no.
any losses offset any gains (short first short, long first long).
then any losses left over can be applied to income up to 3K/year.
then any remaining losses carry over to the next year to repeat the process.

you can only TLH if something you have is a loss from where you bought it.

international001
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by international001 » Wed Jun 06, 2018 11:22 am

Ok.. so I'm doomed

I never understood the big buzz about TLH.. It's nice but not such a big deal once you have a medium-big portfolio.

livesoft
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by livesoft » Wed Jun 06, 2018 11:25 am

international001 wrote:
Wed Jun 06, 2018 11:22 am
Ok.. so I'm doomed

I never understood the big buzz about TLH.. It's nice but not such a big deal once you have a medium-big portfolio.
No worries about that. Many people are in the same boat as you. I'll also say that TLH is important if you have big portfolio, too.

Perhaps the only way you are doomed is if you stop learning.
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H-Town
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by H-Town » Wed Jun 06, 2018 11:53 am

international001 wrote:
Tue Jun 05, 2018 6:09 pm

Also, does this graph really makes sense? You can only use $3000 for TLH each year (and likeky to get the real benefits by multiplying it for [tax_bracket -15%). So it would seem the more money you have in your portfolio, the percentage return should be lower.

https://www.betterment.com/tax-loss-harvesting/
You gotta understand the fundamental of TLH. It's about tax planning to take benefits of tax deduction now and defer tax to the future. Also there are other moving pieces involved in tax planning and maximize growth: do you re-invest tax savings immediately? do you file appropriate IRS form to preserve capital loss carryforwards? do you keep good records of stock basis in case the IRS decides to challenge you wash sale rule? etc.

In my opinion, the graph in that link tells you nothing helpful.

alex_686
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by alex_686 » Wed Jun 06, 2018 12:18 pm

TLH is real. Don't just focus on the $3,000 reduction in income. Its real power is to reduce unrealized capital gains. It is useful when one has a large concentrated low bias position.

Now the bad news. The portfolio model should statistically replicate the underlying index being used. You are going to get some tracking error but it should be minor. It is complex. I have worked on this first hand, back in the 90s with a full service brokerage firm. Most of the complexity was of a simple nature - the stuff that computers handle well. I have no direct experience with betterment so I can't address what they are selling or if you situation can be automated . However their graph does seem in the ballpark of what TLH can do.

international001
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by international001 » Thu Jun 07, 2018 7:37 am

alex_686 wrote:
Wed Jun 06, 2018 12:18 pm
TLH is real. Don't just focus on the $3,000 reduction in income. Its real power is to reduce unrealized capital gains. It is useful when one has a large concentrated low bias position.

Now the bad news. The portfolio model should statistically replicate the underlying index being used. You are going to get some tracking error but it should be minor. It is complex. I have worked on this first hand, back in the 90s with a full service brokerage firm. Most of the complexity was of a simple nature - the stuff that computers handle well. I have no direct experience with betterment so I can't address what they are selling or if you situation can be automated . However their graph does seem in the ballpark of what TLH can do.
Then I was mistaken.. Can you give me an example (or point me to a link)

Let's say I buy 1M in stock A, 1M in stock B
2 years later, stock A value is 1.2M, stock B 0.8M

Should I sell stock B? What is the point? I have losses so my tax due decreases by aprox $200k*15%. But my cost basis is reduced by $200k, so I'm just defering taxes for the future.

I have unrealized capital gains with A. Am I supposed to offset it with B losses?

alex_686
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by alex_686 » Thu Jun 07, 2018 9:14 am

international001 wrote:
Thu Jun 07, 2018 7:37 am
Then I was mistaken.. Can you give me an example (or point me to a link)

Let's say I buy 1M in stock A, 1M in stock B
2 years later, stock A value is 1.2M, stock B 0.8M

Should I sell stock B? What is the point? I have losses so my tax due decreases by aprox $200k*15%. But my cost basis is reduced by $200k, so I'm just defering taxes for the future.

I have unrealized capital gains with A. Am I supposed to offset it with B losses?
In this example you would sell A and B for a net capital gains of $0. Your unrealized capital gains also falls to $0. Then you reinvest in stocks C and D.

In order to do this correctly you need at a minimum 20 different stocks to statistically replicate the S&P 500 with any accuracy. The more the better. You want high beta stocks with low correlations with the other stocks. This is a bit of a contradiction that will pull you in either direction. Then trade frequently to capture the dips.

Like I said before, this requires a fair amount of work and complexity. But it is the type of stuff that computers do well. I think Betterment has a direct indexing product that does this. I will scrounge around and see what stuff I can find, but most of my stuff is technical (system specific), proprietary, or academic.

One last note. We are on Bogleheads and thus favor DIY. However this is a area that a good financial advisor might be able to help you with. Now finding a good financial advisor is almost as tricky as figuring this out.

H-Town
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by H-Town » Thu Jun 07, 2018 9:20 am

alex_686 wrote:
Thu Jun 07, 2018 9:14 am
international001 wrote:
Thu Jun 07, 2018 7:37 am
Then I was mistaken.. Can you give me an example (or point me to a link)

Let's say I buy 1M in stock A, 1M in stock B
2 years later, stock A value is 1.2M, stock B 0.8M

Should I sell stock B? What is the point? I have losses so my tax due decreases by aprox $200k*15%. But my cost basis is reduced by $200k, so I'm just defering taxes for the future.

I have unrealized capital gains with A. Am I supposed to offset it with B losses?
In this example you would sell A and B for a net capital gains of $0. Your unrealized capital gains also falls to $0. Then you reinvest in stocks C and D.

In order to do this correctly you need at a minimum 20 different stocks to statistically replicate the S&P 500 with any accuracy. The more the better. You want high beta stocks with low correlations with the other stocks. This is a bit of a contradiction that will pull you in either direction. Then trade frequently to capture the dips.

Like I said before, this requires a fair amount of work and complexity. But it is the type of stuff that computers do well. I think Betterment has a direct indexing product that does this. I will scrounge around and see what stuff I can find, but most of my stuff is technical (system specific), proprietary, or academic.

One last note. We are on Bogleheads and thus favor DIY. However this is a area that a good financial advisor might be able to help you with. Now finding a good financial advisor is almost as tricky as figuring this out.
Sounds wonderful until you realize that you get hit with transaction cost and fee. And then when you receive 300 pages of the consolidated 1099's at year-end and have to pay your CPA to file your tax return because you don't know how to handle it. Then, you'll hope that your CPA will understand wash sale rule and do your tax return properly. There are so many things that can go wrong here.

I do TLH and I don't need at least 20 different stocks. Keep it simple.

PFInterest
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by PFInterest » Thu Jun 07, 2018 10:24 am

international001 wrote:
Wed Jun 06, 2018 11:22 am
Ok.. so I'm doomed

I never understood the big buzz about TLH.. It's nice but not such a big deal once you have a medium-big portfolio.
um what? how are you doomed?
its an additional tool to make taxable investing more efficient.
it becomes more of a big deal the larger your portfolio becomes. it doesnt matter when your portfolio is small.

international001
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by international001 » Fri Jun 08, 2018 9:31 am

alex_686 wrote:
Thu Jun 07, 2018 9:14 am
Let's say I buy 1M in stock A, 1M in stock B
2 years later, stock A value is 1.2M, stock B 0.8M
In this example you would sell A and B for a net capital gains of $0. Your unrealized capital gains also falls to $0. Then you reinvest in stocks C and D.
[/quote]

Before I sold, I already had total unrealized capital gains of 0 (+$200k for A, -$200k for B)

I'm just trying to understand the concept (forget transactions costs and wash sale rules)

MotoTrojan
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by MotoTrojan » Fri Jun 08, 2018 7:19 pm

international001 wrote:
Fri Jun 08, 2018 9:31 am
alex_686 wrote:
Thu Jun 07, 2018 9:14 am
Let's say I buy 1M in stock A, 1M in stock B
2 years later, stock A value is 1.2M, stock B 0.8M
In this example you would sell A and B for a net capital gains of $0. Your unrealized capital gains also falls to $0. Then you reinvest in stocks C and D.
Before I sold, I already had total unrealized capital gains of 0 (+$200k for A, -$200k for B)

I'm just trying to understand the concept (forget transactions costs and wash sale rules)
[/quote]

It is easier to understand (and has less "risk" or tracking error) with larger indexes.

For example, if you buy $10K in the S&P500 via VOO ETF and the market crashes 50%, you can sell for $5K and use it to buy a similar, but not identical, fund such as Total US Stock Market via VTI ETF, or Large-Cap via VV ETF. All three of these are highly correlated, so you haven't really lost $5K (your exposure to the market is nearly unchanged) but you now can write-off the $5K loss. If you have no (or <$2K in) gains, you can write-off $3K of income that year. If you sell some equities with $5K in gains, you pay no taxes now.

Now imagine you had a $1M holding in the S&P500 and that 50% market crash occurs. You can now sell your ESPP yearly with deferred tax. If you die holding those shares, or donate them, you will never pay the tax at all.

Not bad, eh? Some take this a step further and do this with individual stocks in such a way that the return mirrors the S&P500, but you can still write-off losses even if the index broadly never goes down at all. This is what some firms are now automating.

livesoft
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by livesoft » Fri Jun 08, 2018 7:56 pm

MotoTrojan wrote:
Fri Jun 08, 2018 7:19 pm
..., so you haven't really lost $5K....
Yes, you have really lost $5K.

TLH gets other taxpayers to help pay for your loss. Everybody reading this who has every paid Federal income taxes has helped pay for my losses. Thanks!
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MotoTrojan
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by MotoTrojan » Sat Jun 09, 2018 11:44 am

livesoft wrote:
Fri Jun 08, 2018 7:56 pm
MotoTrojan wrote:
Fri Jun 08, 2018 7:19 pm
..., so you haven't really lost $5K....
Yes, you have really lost $5K.

TLH gets other taxpayers to help pay for your loss. Everybody reading this who has every paid Federal income taxes has helped pay for my losses. Thanks!
You haven’t made it a realized loss or change in equity exposure I should say.

international001
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by international001 » Sun Jun 10, 2018 3:24 pm

MotoTrojan wrote:
Fri Jun 08, 2018 7:19 pm

For example, if you buy $10K in the S&P500 via VOO ETF and the market crashes 50%, you can sell for $5K and use it to buy a similar, but not identical, fund such as Total US Stock Market via VTI ETF, or Large-Cap via VV ETF. All three of these are highly correlated, so you haven't really lost $5K (your exposure to the market is nearly unchanged) but you now can write-off the $5K loss. If you have no (or <$2K in) gains, you can write-off $3K of income that year. If you sell some equities with $5K in gains, you pay no taxes now.
I still don't get it

Scneario 2
you don't do anything you have ETF1 at $5k (year 1)
Price of ETF1 goes to $25k (year 2)

You have ETF1 at cost basis $10k. GAINS = $25k - $10k = $15k (year 2)

Scenario 1
You buy ETF1 at $10k
Sell ETF1 at $5k
Buy ETF2 at $5k (year 1)
Price of ETF2 goes to $20k (year 2)

You deduct losses of $5k . GAIN = -$5k (year 1)
You have ETF2 are with cost basis $5k. GAINS = $25k - $5k = $20k (year 2)

So the gains you have to pay taxes for are $15k no matter what
It's useful if you have short term losses and long term gain (the losses offset your regular income, taxed more heavily)

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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by grabiner » Sun Jun 10, 2018 8:30 pm

There is nothing wrong with using capital losses to offset long-term gains. You don't save as much in taxes as if the losses offset ordinary income, but you still save in taxes. Therefore, while you shouldn't take long-term gains just because there are offsetting losses, you still benefit if you have some other reason (such as diversification with the ESPP, or selling stock in order to spend the money).

I took a large long-term gain to sell stock for a home down payment, and have also received long-term gains from some of my investments. But thanks to tax loss harvesting (mostly in 2008-2009, but some more recently), I haven't paid federal tax on any of those gains.
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AlphaLess
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by AlphaLess » Sun Jun 10, 2018 8:40 pm

livesoft wrote:
Wed Jun 06, 2018 11:25 am
international001 wrote:
Wed Jun 06, 2018 11:22 am
Ok.. so I'm doomed
Perhaps the only way you are doomed is if you stop learning.
Could not stop laughing at that one!

MotoTrojan
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by MotoTrojan » Mon Jun 11, 2018 10:50 am

international001 wrote:
Sun Jun 10, 2018 3:24 pm
MotoTrojan wrote:
Fri Jun 08, 2018 7:19 pm

For example, if you buy $10K in the S&P500 via VOO ETF and the market crashes 50%, you can sell for $5K and use it to buy a similar, but not identical, fund such as Total US Stock Market via VTI ETF, or Large-Cap via VV ETF. All three of these are highly correlated, so you haven't really lost $5K (your exposure to the market is nearly unchanged) but you now can write-off the $5K loss. If you have no (or <$2K in) gains, you can write-off $3K of income that year. If you sell some equities with $5K in gains, you pay no taxes now.
I still don't get it

Scneario 2
you don't do anything you have ETF1 at $5k (year 1)
Price of ETF1 goes to $25k (year 2)

You have ETF1 at cost basis $10k. GAINS = $25k - $10k = $15k (year 2)

Scenario 1
You buy ETF1 at $10k
Sell ETF1 at $5k
Buy ETF2 at $5k (year 1)
Price of ETF2 goes to $20k (year 2)

You deduct losses of $5k . GAIN = -$5k (year 1)
You have ETF2 are with cost basis $5k. GAINS = $25k - $5k = $20k (year 2)

So the gains you have to pay taxes for are $15k no matter what
It's useful if you have short term losses and long term gain (the losses offset your regular income, taxed more heavily)
You’re deferring the loss though, allowing a longer time period to compound (much like a 401k). You can also invest the savings of $3K/yr income if you don’t use it to offset. If you donate the shares or die with them the impact can be even higher.

international001
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by international001 » Tue Jun 12, 2018 4:58 pm

Oh.. I think I get it now

So there is a small (up to 3k) benefit if you offset your income
But then there is another benefit by getting some money from taxes now and paying it later (any amount). I guess that's what betterment and others do.

international001
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Re: TLH (tax loss harvesting) and ESPP. And betterment real?

Post by international001 » Thu Jun 14, 2018 1:24 pm

So what would be a good enough strategy.. Wait till the end of the year for doing any ESPP sell
If I see I had a big loss on other funds, sell those funds and don't do the ESPP sell

Sounds reasonable?

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