PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

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PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Taylor Larimore » Sat Oct 20, 2018 10:47 am

Bogleheads:

The Physician on Fire website alerted me to this excellent step-by-step guide written by Vanguard about Tax-Loss Harvesting:

Tax Loss Harvesting with Vanguard: A Step by Step Guide

Best wishes.
Taylor
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Re: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by gold99xx » Sat Oct 20, 2018 10:48 am

Thank You !!!!

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Re: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by tarmangani » Sat Oct 20, 2018 11:03 am

Only amendment is that it's written by the Physician on Fire. Excellent link/guide, though, thanks.

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Re: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by PhysicianOnFIRE » Sat Oct 20, 2018 11:56 am

Thank you for sharing, Taylor. I credit the Bogleheads, specifically @livesoft and @emergdoc aka White Coat Investor, for teaching me the power of tax loss harvesting.

I didn't have a taxable account in 2008 when huge opportunities were there, but I've found numerous opportunities with the seemingly small blips over the last several years -- enough to deduct $3,000 from the next 25+ years of tax returns if I don't use any carryover losses to offset gains in the meantime.

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Re: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by LadyGeek » Sat Oct 20, 2018 12:36 pm

tarmangani wrote:
Sat Oct 20, 2018 11:03 am
Only amendment is that it's written by the Physician on Fire. Excellent link/guide, though, thanks.
I fixed the thread title.
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Re: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by iceport » Sat Oct 20, 2018 1:00 pm

Thanks to Taylor for the notice, and to PoF for the tutorial. It's an outstanding summary that I've bookmarked for future reference and sharing here on the forum.

Here are some choice quotes I'd like to highlight or comment on.
PoF wrote:TLH is a way to capture a “paper loss” by selling an asset that has declined in value and subsequently purchasing a similar asset to avoid locking in an actual loss.
While this is the method I recommend, TLH does not require purchasing a replacement asset within the wash sale period. (In fact, TLH using replacement index funds that perform practically identically to index funds sold with losses actually violates the whole intent of the wash sale rule, though it certainly appears to be an entirely legal loophole. And it would seem senseless not to take advantage of it!)

PoF wrote:Funds that follow the same index, but are offered by different companies (i.e. Scwab’s SWTSX & Fidelity’s FSTVX, both total stock market funds) would be considered by most to be substantially identical, and are not a wise choice as partners.
This is good general advice, consistent with a list of four mutual fund transactions published in the December 2008 Journal of Financial Planning that are "generally considered to be acceptable" under Section 1091 by industry practitioners. (I learned of this list in Footnote 191 of a legal review on wash sales.)
  1. Sell one index fund and buy another index fund, if the indexes of the two funds are not the same index (e.g., S&P 500 for Russell 1000).
  2. Sell one actively managed fund and buy a fund at another company with different portfolio managers.
  3. Sell an index fund and buy an actively managed fund regardless of the fund company.
  4. Sell an actively managed fund and buy an index fund regardless of the fund company.

PoF wrote:A good partner is not only at least a tiny bit different, but also one you would not mind holding indefinitely. If you’re going to exchange or trade into the fund, you should be comfortable with that asset rising in value and remaining in your account for years.
An excellent word of caution!

PoF wrote:Note that you are not actually losing money when you tax loss harvest. You are selling one fund that has dropped in value and buying a similar (but not identical) fund that has similarly lost value. You are not out of the market for one minute when doing this with mutual funds. You are simply taking the loss against your tax burden and lowering your cost basis.
Ah, the joys of the "exchange" option with mutual funds... 8-)

PoF wrote:Automated investments often take place in a tax-advantaged account like a 401(k), 403(b), 457(b), or SEP or SIMPLE IRA. While investments in these accounts may not be noticed by your taxable brokerage account or the IRS, it’s best to avoid any gray areas, even if the impetus to report them may be on you.
Actually, some here get upset when anything but IRAs are linked to wash sales, because the IRS hasn't yet weighed in on other tax-advantaged retirement accounts. But the advice from PoF on this is certainly logical.

PoF wrote:A wash sale is a purchase of identical or “substantially identical” replacement shares of an asset you sold at a loss during that 60-day (30 days before and 30 days after) timeframe.
A minor quibble on this: the wash sale period is actually 61 days long. The day of the selling at a loss is also included. :|
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by PhysicianOnFIRE » Sat Oct 20, 2018 3:13 pm

Thank you for the feedback, Iceport. I changed 60 days to 61 and added the following paragraph to clarify that the purchase of a similar fund is not required (even if it is recommended).

"Note: it is not required that you purchase a similar fund. You can also choose to allow that money to sit out of the market for 31 days and buy back the fund you sold or you can invest in something completely different right away. However, by waiting, you may miss out on a quick rebound and by investing in something else, you're altering your asset allocation."

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by heartwood » Sat Oct 20, 2018 3:43 pm

Thank you for the outline!

Any simple advice on TLH in tax exempt bond funds? I recall there's some wrinkle perhaps around reinvested dividends.

Sorry if I missed it in the article.

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by JustinR » Sat Oct 20, 2018 4:03 pm

Thank you for this excellent guide.

Two questions:

1) Do online tax preparation sites like TurboTax and TaxAct make recording tax losses, and tax losses rolled over from previous years, easy?

2) You're lowering your cost basis, which means you'll pay more on taxes later on right? This is still a net gain since you're saving on income tax while paying long-term capital gains tax. Am I correct?

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Taylor Larimore » Sat Oct 20, 2018 4:32 pm

PhysicianOnFIRE wrote:
Sat Oct 20, 2018 3:13 pm
Thank you for the feedback, Iceport. I changed 60 days to 61 and added the following paragraph to clarify that the purchase of a similar fund is not required (even if it is recommended).

"Note: it is not required that you purchase a similar fund. You can also choose to allow that money to sit out of the market for 31 days and buy back the fund you sold or you can invest in something completely different right away. However, by waiting, you may miss out on a quick rebound and by investing in something else, you're altering your asset allocation."
Bogleheads:

This is exactly what I do when we have a tax-loss, I simply move our losing shares to a safe money market fund, wait 30 days, then repurchase the fund. I might miss a 30-day rebound, but I often miss a 30-day decline.

Best wishes.
Taylor
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by columbia » Sat Oct 20, 2018 5:39 pm

Taylor Larimore wrote:
Sat Oct 20, 2018 4:32 pm
PhysicianOnFIRE wrote:
Sat Oct 20, 2018 3:13 pm
Thank you for the feedback, Iceport. I changed 60 days to 61 and added the following paragraph to clarify that the purchase of a similar fund is not required (even if it is recommended).

"Note: it is not required that you purchase a similar fund. You can also choose to allow that money to sit out of the market for 31 days and buy back the fund you sold or you can invest in something completely different right away. However, by waiting, you may miss out on a quick rebound and by investing in something else, you're altering your asset allocation."
Bogleheads:

This is exactly what I do when we have a tax-loss, I simply move our losing shares to a safe money market fund, wait 30 days, then repurchase the fund. I might miss a 30-day rebound, but I often miss a 30-day decline.

Best wishes.
Taylor

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by MathIsMyWayr » Sat Oct 20, 2018 7:37 pm

JustinR wrote:
Sat Oct 20, 2018 4:03 pm
Thank you for this excellent guide.

Two questions:

1) Do online tax preparation sites like TurboTax and TaxAct make recording tax losses, and tax losses rolled over from previous years, easy?

2) You're lowering your cost basis, which means you'll pay more on taxes later on right? This is still a net gain since you're saving on income tax while paying long-term capital gains tax. Am I correct?
2) Yes. Assume you take advantage of TLH, e.g., $100. Your cash will increase by $100 minus tax, e.g., $71, through tax saving. You may also invest $71 which will grow over time. The tax basis of the replacement investment is lowered by $100 which is a fixed amount. You may have to pay a CG tax on $100 when you dispose of the investment. TLH will be a net gain.

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by PhysicianOnFIRE » Sat Oct 20, 2018 8:03 pm

MathIsMyWayr wrote:
Sat Oct 20, 2018 7:37 pm
JustinR wrote:
Sat Oct 20, 2018 4:03 pm
Thank you for this excellent guide.

Two questions:

1) Do online tax preparation sites like TurboTax and TaxAct make recording tax losses, and tax losses rolled over from previous years, easy?

2) You're lowering your cost basis, which means you'll pay more on taxes later on right? This is still a net gain since you're saving on income tax while paying long-term capital gains tax. Am I correct?
2) Yes. Assume you take advantage of TLH, e.g., $100. Your cash will increase by $100 minus tax, e.g., $71, through tax saving. You may also invest $71 which will grow over time. The tax basis of the replacement investment is lowered by $100 which is a fixed amount. You may have to pay a CG tax on $100 when you dispose of the investment. TLH will be a net gain.


Regarding question 2) I will also add that there are numerous ways to avoid capital gains taxes.

Have a taxable income under ~ $77,000 (mfj) and pay 0 on capital gains (except maybe state income tax).

Pass along to heirs in a stepped up cost basis.

Donate appreciated funds to charity either directly or indirectly via a donor advised fund.

At worst, you'll pay the lower capital gains rate after a deduction from your marginal tax rate on ordinary income.

:beer
-PoF
Last edited by PhysicianOnFIRE on Sun Oct 21, 2018 7:44 am, edited 1 time in total.

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by RandalThor » Sat Oct 20, 2018 8:20 pm

What a great tutorial. I just looked into assigning a cost basis of “Specific Identification” to my taxable account funds and it gave me a warning about “noncovered” shares.
• For shares purchased before January 1, 2012, and subsequently sold (known as noncovered shares), we're only able to provide average cost information because we won't know which cost basis method you used in the past or which tax lots remain in your account.
• Make sure you have accurate cost basis records for your noncovered shares because you'll be responsible for reporting to the IRS any gains and losses on sales of these shares
I’m not sure if this should steer me clear of all this and not select that form of cost basis or not.

Any thoughts?

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by LadyGeek » Sat Oct 20, 2018 8:23 pm

This thread is now in the wiki: Tax loss harvesting - Bogleheads (External links)

PhysicianOnFIRE - Your blog posts only show publication dates on your home page. When I go to the actual blog link, the publication date is missing. Would it be possible to show the publication date (and author) under the title of each individual blog post? Otherwise, it's difficult to know when the post was published.

Based on comments, this article was first published February 13, 2018. (Revised October 18, 2018?).
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by JustinR » Sat Oct 20, 2018 11:12 pm

PhysicianOnFIRE wrote:
Sat Oct 20, 2018 8:03 pm
MathIsMyWayr wrote:
Sat Oct 20, 2018 7:37 pm
JustinR wrote:
Sat Oct 20, 2018 4:03 pm
Thank you for this excellent guide.

Two questions:

1) Do online tax preparation sites like TurboTax and TaxAct make recording tax losses, and tax losses rolled over from previous years, easy?

2) You're lowering your cost basis, which means you'll pay more on taxes later on right? This is still a net gain since you're saving on income tax while paying long-term capital gains tax. Am I correct?
2) Yes. Assume you take advantage of TLH, e.g., $100. Your cash will increase by $100 minus tax, e.g., $71, through tax saving. You may also invest $71 which will grow over time. The tax basis of the replacement investment is lowered by $100 which is a fixed amount. You may have to pay a CG tax on $100 when you dispose of the investment. TLH will be a net gain.
Question 1) was addressed above.
Sorry, where was question 1 addressed? I can't seem to find it :(

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by PhysicianOnFIRE » Sun Oct 21, 2018 7:43 am

LadyGeek wrote:
Sat Oct 20, 2018 8:23 pm
This thread is now in the wiki: Tax loss harvesting - Bogleheads (External links)

PhysicianOnFIRE - Your blog posts only show publication dates on your home page. When I go to the actual blog link, the publication date is missing. Would it be possible to show the publication date (and author) under the title of each individual blog post? Otherwise, it's difficult to know when the post was published.

Based on comments, this article was first published February 13, 2018. (Revised October 18, 2018?).
You are correct -- the date of the first comment will coincide with the original publication date on any of my articles. I try to update the more popular posts from time to time to keep them "evergreen."

In this particular post, I state in the introduction "Note: This article was originally published in February of 2018 and was updated in October of 2018."

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by PhysicianOnFIRE » Sun Oct 21, 2018 7:46 am

JustinR wrote:
Sat Oct 20, 2018 11:12 pm
PhysicianOnFIRE wrote:
Sat Oct 20, 2018 8:03 pm
MathIsMyWayr wrote:
Sat Oct 20, 2018 7:37 pm
JustinR wrote:
Sat Oct 20, 2018 4:03 pm
Thank you for this excellent guide.

Two questions:

1) Do online tax preparation sites like TurboTax and TaxAct make recording tax losses, and tax losses rolled over from previous years, easy?

2) You're lowering your cost basis, which means you'll pay more on taxes later on right? This is still a net gain since you're saving on income tax while paying long-term capital gains tax. Am I correct?
2) Yes. Assume you take advantage of TLH, e.g., $100. Your cash will increase by $100 minus tax, e.g., $71, through tax saving. You may also invest $71 which will grow over time. The tax basis of the replacement investment is lowered by $100 which is a fixed amount. You may have to pay a CG tax on $100 when you dispose of the investment. TLH will be a net gain.
Question 1) was addressed above.
Sorry, where was question 1 addressed? I can't seem to find it :(
My bad -- I guess it wasn't. I don't use tax prep software, but Turbotax appears to have you covered.

:beer
-PoF

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by grabiner » Sun Oct 21, 2018 10:40 am

JustinR wrote:
Sat Oct 20, 2018 4:03 pm
2) You're lowering your cost basis, which means you'll pay more on taxes later on right? This is still a net gain since you're saving on income tax while paying long-term capital gains tax. Am I correct?
This is one reason for a net gain. A second reason is that you might never pay the capital-gains tax, if you leave the replacement shares to your heirs or donate them to your charity. And even if neither of these applies, it is better to save tax now to pay tax later; if you offset a $1000 long-term capital gain with a harvested loss this year, and sell the shares ten years later for $1000 more in gains, you saved $150 in tax this year and had ten years to invest it before you paid the $150 tax.
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Re: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Earl Lemongrab » Sun Oct 21, 2018 1:40 pm

iceport wrote:
Sat Oct 20, 2018 1:00 pm
While this is the method I recommend, TLH does not require purchasing a replacement asset within the wash sale period. (In fact, TLH using replacement index funds that perform practically identically to index funds sold with losses actually violates the whole intent of the wash sale rule, though it certainly appears to be an entirely legal loophole. And it would seem senseless not to take advantage of it!)
No, the intent of the rule is to follow the tax code. The tax code says "substantially identical". It doesn't into any "whys" or "intents". The IRS then has to interpret the law to produce regulations. They must defend those in tax court when challenged.

Congress has had a long time to change the code to reflect any differences due to index mutual funds. The IRS has had a long time to go over the code and decide whether there should be changes to reflect any new thinking due to index mutual funds. Neither has.
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Nomar » Sun Oct 21, 2018 3:08 pm

Thanks. I enjoyed the link and hope to profit from it by selling this year's loss in the short term bond fund.

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by JustinR » Sun Oct 21, 2018 4:32 pm

Another question: there's no implications of how long you've owned the shares right?

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Earl Lemongrab » Sun Oct 21, 2018 5:02 pm

JustinR wrote:
Sun Oct 21, 2018 4:32 pm
Another question: there's no implications of how long you've owned the shares right?
There is. Shares held less than a year have short-term losses. There are some complexities with muni funds, but I'm not that familiar with the details.
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Re: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by iceport » Sun Oct 21, 2018 5:11 pm

Earl Lemongrab wrote:
Sun Oct 21, 2018 1:40 pm
iceport wrote:
Sat Oct 20, 2018 1:00 pm
While this is the method I recommend, TLH does not require purchasing a replacement asset within the wash sale period. (In fact, TLH using replacement index funds that perform practically identically to index funds sold with losses actually violates the whole intent of the wash sale rule, though it certainly appears to be an entirely legal loophole. And it would seem senseless not to take advantage of it!)
No, the intent of the rule is to follow the tax code.
Actually, the intent of the wash sales provisions is to prevent tax manipulation by a taxpayer who attempts to recognize a loss on the sale of 'securities' while maintaining an identical or nearly identical investment position.

The intent was to close down an abused tax haven.

The intent was not to just blindly create a new rule for taxpayers to follow, with no other objective.

The fact that the wash sale rule has been allowed to atrophy in the face of modern financial instruments calls into question a continued commitment to keeping the tax haven closed. (Most likely, there are interests on both sides of the issue, as there surely was back in 1921.) But that still doesn't erase the original intent.
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by JustinR » Sun Oct 21, 2018 5:14 pm

Earl Lemongrab wrote:
Sun Oct 21, 2018 5:02 pm
JustinR wrote:
Sun Oct 21, 2018 4:32 pm
Another question: there's no implications of how long you've owned the shares right?
There is. Shares held less than a year have short-term losses. There are some complexities with muni funds, but I'm not that familiar with the details.
What's the difference between short term and long term losses for TLH?

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by grabiner » Sun Oct 21, 2018 5:16 pm

Earl Lemongrab wrote:
Sun Oct 21, 2018 5:02 pm
JustinR wrote:
Sun Oct 21, 2018 4:32 pm
Another question: there's no implications of how long you've owned the shares right?
There is. Shares held less than a year have short-term losses. There are some complexities with muni funds, but I'm not that familiar with the details.
The rule with muni bonds or funds is that, if you have held a bond or share for six months or less, and it does not accrue dividends daily, you must reduce your capital loss by the amount of the tax-exempt dividend. With Vanguard's muni funds, there would not be an issue; the funds accrue dividends daily. However, it does apply to muni ETFs such as Vanguard's VTEB, which pays dividends monthly but does not accrue them.

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by grabiner » Sun Oct 21, 2018 5:18 pm

JustinR wrote:
Sun Oct 21, 2018 5:14 pm
What's the difference between short term and long term losses for TLH?
If you have both short-term and long-term gains, short-term losses offset short-term gains, and long-term losses offset long-term gains. If you still have both losses and gains, losses will offset gains of the other time.

Thus short-term losses are slightly better than long-term losses. There is only a difference if your gains exceed your losses and you have both short-term and long-term gains in the same year; if you have short-term losses, more of your taxable gains will be long-term.
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Re: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Earl Lemongrab » Sun Oct 21, 2018 6:55 pm

iceport wrote:
Sun Oct 21, 2018 5:11 pm
Actually, the intent of the wash sales provisions is to prevent tax manipulation by a taxpayer who attempts to recognize a loss on the sale of 'securities' while maintaining an identical or nearly identical investment position.
Actually, no. The IRS does not make legislation. By and large what you find on wash sales is in the tax code. In the case of IRAs, they researched and wrote an opinion as to why those should be included under the existing law and prior tax court rulings.

All that stuff about tax havens and atrophy is your opinion, inserted as if it had some factual basis.
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by LadyGeek » Sun Oct 21, 2018 7:30 pm

I removed an off-topic post. As a reminder, this is a "no politics" forum. Wash sale rules are derived from US law, which is a political (legislative) process. Discussions of the political process are off-topic. See: Politics and Religion
In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:
  • Common religious expressions such as sending your prayers to an ailing member.
  • Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
  • Discussions about enacted laws or regulations that affect the individual investor. Note that discussions of proposed legislation are prohibited.
  • Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
Please stay focused on the investing aspects.
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by RandalThor » Sun Oct 21, 2018 7:56 pm

Hi Bogleheads,

Maybe my question was missed earlier so thought I’d ask again. If this is better suited to be its own thread vs. asked here, please let me know and I can re-post it.

Thanks!

Rand
RandalThor wrote:
Sat Oct 20, 2018 8:20 pm
What a great tutorial. I just looked into assigning a cost basis of “Specific Identification” to my taxable account funds and it gave me a warning about “noncovered” shares.
• For shares purchased before January 1, 2012, and subsequently sold (known as noncovered shares), we're only able to provide average cost information because we won't know which cost basis method you used in the past or which tax lots remain in your account.
• Make sure you have accurate cost basis records for your noncovered shares because you'll be responsible for reporting to the IRS any gains and losses on sales of these shares
I’m not sure if this should steer me clear of all this and not select that form of cost basis or not.

Any thoughts?

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Lancelot » Sun Oct 21, 2018 7:59 pm

Great article, thanks for sharing. I never thought about automatic dividend reinvestment screwing up a tax loss sale :oops:
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Methedras » Sun Oct 21, 2018 8:11 pm

This was awesome. Thanks so much for the write up!

I'm going to venture a potentially ignorant question: Is there any reason that someone wouldn't want to take advantage of tax loss harvesting?

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by iceport » Sun Oct 21, 2018 9:38 pm

Methedras wrote:
Sun Oct 21, 2018 8:11 pm
This was awesome. Thanks so much for the write up!

I'm going to venture a potentially ignorant question: Is there any reason that someone wouldn't want to take advantage of tax loss harvesting?
The linked article contains some practical points of caution. But perhaps the most basic one was left unsaid.

In harvesting a loss, an investor also lowers the cost basis of the holding. So it's important to remain focused on total after-tax returns. TLH is just an intermediate step along the way to finally spending or otherwise disposing of 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.

Applying the capital losses to offset ordinary income taxed at higher rates is an excellent way to maximize the tax savings. Having plans to gift or donate the holdings is another possibility.

But if your losses are large enough to carry forward for many years, it is likely that 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 circumstances at that future point in time. The further into the future your losses carry forward, the less precisely known are your ultimate tax savings.

Articles like this one, from the CFA Institute, provide more detail: Tax-Loss Harvesting: Should Investors Believe the Hype?
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Methedras » Sun Oct 21, 2018 10:33 pm

Thanks for the excellent reply, iceport.

I've read through the article from PhysicianOnFire carefully, as well as the link you provided, and many other articles, blog posts, guides, etc., and after careful study I was just finding tax loss harvesting to good to be true. I'm lucky enough to be in a marginal tax bracket where tax loss harvesting makes it a "guaranteed win", and in general I've been fighting this nagging suspicion that I just missed some critical detail.

Thanks for the feedback. :beer

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by JustinR » Thu Oct 25, 2018 1:53 am

I'd like to sell VTIAX in my taxable account.

I automatically reinvested dividends for VTIAX in my RothIRA on 9/25.

1) This means the earliest I can sell VTIAX in my taxable for TLH is 10/26, is that right?

2) Do you think VFWAX is "substantially unidentical" enough from VTIAX for TLH?

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by bayview » Thu Oct 25, 2018 8:58 am

RandalThor wrote:
Sun Oct 21, 2018 7:56 pm
Hi Bogleheads,

Maybe my question was missed earlier so thought I’d ask again. If this is better suited to be its own thread vs. asked here, please let me know and I can re-post it.

Thanks!

Rand
RandalThor wrote:
Sat Oct 20, 2018 8:20 pm
What a great tutorial. I just looked into assigning a cost basis of “Specific Identification” to my taxable account funds and it gave me a warning about “noncovered” shares.
• For shares purchased before January 1, 2012, and subsequently sold (known as noncovered shares), we're only able to provide average cost information because we won't know which cost basis method you used in the past or which tax lots remain in your account.
• Make sure you have accurate cost basis records for your noncovered shares because you'll be responsible for reporting to the IRS any gains and losses on sales of these shares
I’m not sure if this should steer me clear of all this and not select that form of cost basis or not.

Any thoughts?
How large (percentage) of your taxable holdings were purchased before 1/1/2102?

Even if you have a pretty good chunk in there, why wouldn't you want to use specific ID for later purchases?
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by PhysicianOnFIRE » Thu Oct 25, 2018 9:19 am

JustinR wrote:
Thu Oct 25, 2018 1:53 am
I'd like to sell VTIAX in my taxable account.

I automatically reinvested dividends for VTIAX in my RothIRA on 9/25.

1) This means the earliest I can sell VTIAX in my taxable for TLH is 10/26, is that right?

2) Do you think VFWAX is "substantially unidentical" enough from VTIAX for TLH?
1) Not exactly. Assuming the number of shares received as a dividend in the Roth IRA is smaller than the amount you plan to sell to TLH, you'll only have a partial wash sale if you were to TLH within 30 days. That being said, we're so close to the 30-day mark, that it makes sense to wait a day.

What I don't know -- and hopefully someone here can answer -- is if you could sell the shares you received as a dividend in Roth on the same day that you TLH in taxable to negate the partial wash sale.

2) Yes, I have TLH'd from VTIAX to VFWAX and back again. They follow different indices.

:beer
-PoF

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by AnalogKid22 » Thu Oct 25, 2018 9:52 am

Thanks for this! A very timely post for me.
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by restingonmylaurels » Thu Oct 25, 2018 10:41 am

Taylor Larimore wrote:
Sat Oct 20, 2018 4:32 pm
PhysicianOnFIRE wrote:
Sat Oct 20, 2018 3:13 pm
Thank you for the feedback, Iceport. I changed 60 days to 61 and added the following paragraph to clarify that the purchase of a similar fund is not required (even if it is recommended).

"Note: it is not required that you purchase a similar fund. You can also choose to allow that money to sit out of the market for 31 days and buy back the fund you sold or you can invest in something completely different right away. However, by waiting, you may miss out on a quick rebound and by investing in something else, you're altering your asset allocation."
Bogleheads:

This is exactly what I do when we have a tax-loss, I simply move our losing shares to a safe money market fund, wait 30 days, then repurchase the fund. I might miss a 30-day rebound, but I often miss a 30-day decline.

Best wishes.
Taylor
Taylor,

This topics is on my mind, as I will TLH my TBM (as described in other posts) shortly and it is good to understand you leave your funds in the money markets during the wash sale window.

I have a query about timing of a TLH. Clearly one would want to optimize the investment's value, tax loss, and income earned.

I know when I TLH the funds into the MMR, I start to earn less income. I suspect the TBM's portfolio valuation will not decline much the rest of the year, meaning my investment value will stay the same or possible increase slightly (although my tax loss would diminish slightly).

When deciding to pull the trigger on a tax loss, which of those three metrics is top of your list to maximize and so influences you to wait a day or a week or even a month to initiate the sale?

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Taylor Larimore » Thu Oct 25, 2018 3:59 pm

restingonmylaurels:

I will try to answer your questions in blue:
I have a query about timing of a TLH. Clearly one would want to optimize the investment's value, tax loss, and income earned.

I know when I TLH the funds into the MMR, I start to earn less income. I suspect the TBM's portfolio valuation will not decline much the rest of the year, meaning my investment value will stay the same or possible increase slightly (although my tax loss would diminish slightly).
No one knows what TBM will do the rest of the year. Forget market-timing.

When deciding to pull the trigger on a tax loss, which of those three metrics is top of your list to maximize and so influences you to wait a day or a week or even a month to initiate the sale?

I assume your "three metrics" are "investment's value, tax loss, and income earned." I took a tax-loss whenever losses reached about $1,000.

Don't sweat it. I have read articles like this saying that Tax-loss Harvesting can even be harmful.

Read my "simplicity" link below.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by oldzey » Thu Oct 25, 2018 8:52 pm

I found this article by Jonathan Ping at MyMoneyBlog (and the recommended fund overlap tool) to be insightful:

ETF Tax-Loss Harvesting: 70% Overlap Rule of Thumb for Substantially Identical

ETF Research Center Fund Overlap Tool (requires registration for a free membership)
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by restingonmylaurels » Fri Oct 26, 2018 7:09 am

Taylor Larimore wrote:
Thu Oct 25, 2018 3:59 pm

I took a tax-loss whenever losses reached about $1,000.
Taylor,

I would like to understand better what your actual TLH practice is, so let me ask a few questions.

Does this mean on any day when you suffer a $1000 loss you TLH, such that on 4 out of the last 5 days you have sold shares to pick up the tax loss?

Or do you check monthly or yearly and then TLH?

And why such a low threshold amount for TLH, for someone who is assuredly quite well off?

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Taylor Larimore » Fri Oct 26, 2018 8:51 am

restingonmylaurels wrote:
Fri Oct 26, 2018 7:09 am
Taylor Larimore wrote:
Thu Oct 25, 2018 3:59 pm

I took a tax-loss whenever losses reached about $1,000.
Taylor,

I would like to understand better what your actual TLH practice is, so let me ask a few questions.

Does this mean on any day when you suffer a $1000 loss you TLH, such that on 4 out of the last 5 days you have sold shares to pick up the tax loss?

Or do you check monthly or yearly and then TLH?

And why such a low threshold amount for TLH, for someone who is assuredly quite well off?
restingonmylaurels:

$1,000 is not a "low threshold" for tax-loss harvesting. Anyone would pick-up a $1,000 bill lying on the sidewalk.

I have been unable to tax-loss harvest for many years. This is because my stock shares, purchased many years ago, are in Vanguard 500 Index Fund with large gains which offset bear market declines. Dividends go into a no-loss money market fund for my retirement spending.

Best wishes.
Taylor
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by grabiner » Fri Oct 26, 2018 9:18 pm

Taylor Larimore wrote:
Fri Oct 26, 2018 8:51 am
$1,000 is not a "low threshold" for tax-loss harvesting. Anyone would pick-up a $1,000 bill lying on the sidewalk.
However, harvesting a $1000 loss is not worth $1000; in a 24% tax bracket, it is worth $240 in the year you get the deduction, reduced by $150 in the year you sell the replacement shares if you sell them. That's still worth doing if you get an immediate benefit.

I have enough carryover losses that the benefit for me is less clear; I might sell the replacement shares before I have used up the carryover losses. Therefore, I won't harvest a 5% loss (even if that is $1000 on a $20,000 lot) if there will be transaction costs (for example, selling a low-volume ETF and losing the spread, plus the cost of my time making the trade). If the loss becomes 10%, I will harvest it then, as the cost of harvesting is no greater and the benefit is doubled. (And I did just that on VSS two weeks ago.)
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by Taylor Larimore » Fri Oct 26, 2018 10:07 pm

Grabner:

Thank you for expanding on my short Reply.

Best wishes.
Taylor
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by LadyGeek » Sat Oct 27, 2018 1:03 pm

InvestVS has a question which I've moved into another thread. See: Re: Help with Tax Loss Harvesting for VWO
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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by vwgrrc » Sat Oct 27, 2018 5:05 pm

Someone please help me with this. Are these exchanges allowable to trigger TLH (regardless AA):

1. Emerging Market Index -> FTSE All-World ex-US Index Admiral
2. Total International Index -> S&P 500 Index

I wanted to exchange #2 to total US Index. But I plan to add more to that fund (Total US Index) within the next month. So I need to avoid buying that at this time to avoid wash sale, right :confused

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by PhysicianOnFIRE » Sat Oct 27, 2018 6:54 pm

vwgrrc wrote:
Sat Oct 27, 2018 5:05 pm
Someone please help me with this. Are these exchanges allowable to trigger TLH (regardless AA):

1. Emerging Market Index -> FTSE All-World ex-US Index Admiral
2. Total International Index -> S&P 500 Index

I wanted to exchange #2 to total US Index. But I plan to add more to that fund (Total US Index) within the next month. So I need to avoid buying that at this time to avoid wash sale, right :confused
This would not trigger a wash sale. You only need to be concerned with buying "replacement shares" of the funds you sell at a loss for the 30 days before and after the tax loss harvest. You can exchange into something and buy it every day for the next 30 days if you wish.

:beer
-PoF

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by vwgrrc » Sat Oct 27, 2018 8:21 pm

PhysicianOnFIRE wrote:
Sat Oct 27, 2018 6:54 pm
vwgrrc wrote:
Sat Oct 27, 2018 5:05 pm
Someone please help me with this. Are these exchanges allowable to trigger TLH (regardless AA):

1. Emerging Market Index -> FTSE All-World ex-US Index Admiral
2. Total International Index -> S&P 500 Index

I wanted to exchange #2 to total US Index. But I plan to add more to that fund (Total US Index) within the next month. So I need to avoid buying that at this time to avoid wash sale, right :confused
This would not trigger a wash sale. You only need to be concerned with buying "replacement shares" of the funds you sell at a loss for the 30 days before and after the tax loss harvest. You can exchange into something and buy it every day for the next 30 days if you wish.

:beer
-PoF
That's what I keep seeing but I think I didn't really understand what it means. In this case #2, a wash sale will be I sold Total International Stock and buy S&P 500 as an exchange. Then I buy some Total International Stock back again with in 30 days. That is a wash sale, correct. Just to confirm. Thank you!

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Re: PhysicianOnFire blog: "Tax Loss Harvesting with Vanguard: A Step by Step Guide"

Post by fortyofforty » Sun Oct 28, 2018 6:35 am

Very informative. It follows what I've tried to do. One question: is it truly possible in Vanguard to have dividends and capital gains automatically invested in another mutual fund (Money Market - Prime, or Short Term Bond, for example) rather than the Settlement Fund? I'll be thrilled if this is possible.
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