Tax Loss Harvesting Worth it?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
understandingJH
Posts: 286
Joined: Thu Apr 01, 2010 1:18 pm

Tax Loss Harvesting Worth it?

Post by understandingJH » Sat Jul 20, 2019 5:17 pm

I have five accounts:

Employer:
HSA: 4%
401k: 15%

Vanguard:
IRA: 30%
Roth: 20%
Taxable: 31%

Since my employer accounts will reinvest dividends and keep buying funds, Tax Loss Harvesting (TLH) seems to only work if it's for funds that are not in these accounts. For example, I can keep Total International (TI) only at Vanguard and set it up to not reinvest dividends. I would be overweight in US stocks if I kept TI only in taxable (without selling some of my US stocks there). To avoid capital gains taxes of selling US stocks to make room for the entire TI amount in taxable, I'd also need to keep some TI in my IRA or Roth.

This would expose 14% (about half of TI stocks) of my portfolio to TLH opportunities. Does this strategy make sense? I'm targeting TI because it's 30% of my portfolio and I also would get the foreign tax credit on good years by keeping as much as I can in taxable.

Lastly, is TLH worth it? I'm in the 15% capital gains bracket. It's my understanding that TLH defers taxes to the future due to a lower cost basis on the shares sold and then bought. Does this mean that each year I take the full TLH benefit it's like contributing $3000 to a tax-deferred account?

mhalley
Posts: 7654
Joined: Tue Nov 20, 2007 6:02 am

Re: Tax Loss Harvesting Worth it?

Post by mhalley » Sat Jul 20, 2019 5:26 pm

I don’t recall the value of my taxable portfolio at the time, but in the 2008-9 crash I TLH 68k of losses. That saved me a fair bit in taxes over the next few years. Kitces calculated the value here. https://www.kitces.com/blog/evaluating- ... arvesting/
. while the benefit of tax loss harvesting is positive, it is not “huge” and is far smaller than “tax alpha” (calculated based on single-year tax savings alone) implies; with a 30% decline followed by 7% growth, the economic value of tax loss harvesting rises as high as almost 0.30%/year of additional annualized return equivalent at 15% tax rate ....


The bottom line, though, is simply this: tax loss harvesting (TLH) does have some economic benefit over time, although it’s driven not by the outright savings (typically measured by “tax alpha”), but instead by the economic value of tax deferral, which leads to modest but non-trivial economic benefits over time. For those who may experience tax bracket changes, the benefits can be significant amplified – for better or worse – and in fact, the impact of tax bracket arbitrage can be many times more significant than the underlying benefits of tax deferral itself. As a result, it’s crucial to focus not just on the tax deferral value of loss harvesting, but also the potential tax bracket impacts… and to the extent any anticipated tax bracket changes are favorable, and there are gains to offset with the losses in the first place, harvest as much as possible, maximizing the opportunity for each contribution, each investment/asset class being held, and by “checking” for loss harvesting opportunities as often as possible!

livesoft
Posts: 68606
Joined: Thu Mar 01, 2007 8:00 pm

Re: Tax Loss Harvesting Worth it?

Post by livesoft » Sat Jul 20, 2019 5:41 pm

I think that you play it by ear. Some years you may want to tax gain harvest and even use up previous losses. Some years you may want to realize losses. Some years you may want to donate shares to your DAF. Some years you may want to do big Roth conversions.

But you should be comfortable creating a wash sale within your taxable account where the loss is only temporarily disallowed and essentially deferred. Don't be intimidated by folks on this forum who don't understand wash sales.
Wiki This signature message sponsored by sscritic: Learn to fish.

jebmke
Posts: 9839
Joined: Thu Apr 05, 2007 2:44 pm

Re: Tax Loss Harvesting Worth it?

Post by jebmke » Sat Jul 20, 2019 5:47 pm

livesoft wrote:
Sat Jul 20, 2019 5:41 pm
But you should be comfortable creating a wash sale within your taxable account where the loss is only temporarily disallowed and essentially deferred. Don't be intimidated by folks on this forum who don't understand wash sales.
Also, part of the fear is that "wash sale" has a bit of a ring to it that sounds a bit nefarious like "money laundering." It suffers from a brand issue.
When you discover that you are riding a dead horse, the best strategy is to dismount.

User avatar
iceport
Posts: 4118
Joined: Sat Apr 07, 2007 4:29 pm

Re: Tax Loss Harvesting Worth it?

Post by iceport » Sat Jul 20, 2019 5:56 pm

livesoft wrote:
Sat Jul 20, 2019 5:41 pm
But you should be comfortable creating a wash sale within your taxable account where the loss is only temporarily disallowed and essentially deferred. Don't be intimidated by folks on this forum who don't understand wash sales.
I understand wash sales pretty darned well.

I'm also well acquainted with experience of stubbing my toe.

Without question, I prefer to avoid both. :D 8-)
"Discipline matters more than allocation.” ─William Bernstein

User avatar
firebirdparts
Posts: 349
Joined: Thu Jun 13, 2019 4:21 pm

Re: Tax Loss Harvesting Worth it?

Post by firebirdparts » Sat Jul 20, 2019 9:52 pm

understandingJH wrote:
Sat Jul 20, 2019 5:17 pm
Lastly, is TLH worth it? I'm in the 15% capital gains bracket. It's my understanding that TLH defers taxes to the future due to a lower cost basis on the shares sold and then bought.
Awesome. It does my heart good to know somebody actually understands it. Would I do it? No. You can. I'm not very optimistic about me ever living below the 15% bracket.
A fool and your money are soon partners

User avatar
willthrill81
Posts: 13947
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Tax Loss Harvesting Worth it?

Post by willthrill81 » Sat Jul 20, 2019 10:01 pm

firebirdparts wrote:
Sat Jul 20, 2019 9:52 pm
understandingJH wrote:
Sat Jul 20, 2019 5:17 pm
Lastly, is TLH worth it? I'm in the 15% capital gains bracket. It's my understanding that TLH defers taxes to the future due to a lower cost basis on the shares sold and then bought.
Awesome. It does my heart good to know somebody actually understands it. Would I do it? No. You can. I'm not very optimistic about me ever living below the 15% bracket.
You mean the 12% bracket? :wink:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
abuss368
Posts: 16056
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Tax Loss Harvesting Worth it?

Post by abuss368 » Sat Jul 20, 2019 11:32 pm

Not sure. Jack Bogle never really recommended it that I am aware of.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

User avatar
willthrill81
Posts: 13947
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Tax Loss Harvesting Worth it?

Post by willthrill81 » Sun Jul 21, 2019 5:40 pm

Tax loss harvesting gets discussed around here fairly often, but tax gain harvesting doesn't get enough press, in my view.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
grabiner
Advisory Board
Posts: 25396
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Tax Loss Harvesting Worth it?

Post by grabiner » Sun Jul 21, 2019 9:06 pm

understandingJH wrote:
Sat Jul 20, 2019 5:17 pm
Lastly, is TLH worth it? I'm in the 15% capital gains bracket. It's my understanding that TLH defers taxes to the future due to a lower cost basis on the shares sold and then bought. Does this mean that each year I take the full TLH benefit it's like contributing $3000 to a tax-deferred account?
Actually, it is better than this. If you are in the 24% regular income bracket and don't have any capital gains in the year you harvest, the $3000 saves you $720 on your taxes this year. Then, with the increased basis, you pay only $450 extra in tax when you sell the replacement fund. You gain an immediate $270, and get a tax deferral on the $450.

You may wind up saving even more if you never pay the capital-gains tax. I have donated to charity a lot of the low-basis shares which I bought as replacements after tax loss harvesting, so I got the full benefit ($930 per year in my 31% combined federal and state tax bracket at the time).
Wiki David Grabiner

AlohaJoe
Posts: 4930
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Tax Loss Harvesting Worth it?

Post by AlohaJoe » Sun Jul 21, 2019 9:18 pm

understandingJH wrote:
Sat Jul 20, 2019 5:17 pm
Lastly, is TLH worth it?
Worth what? Worth the 5 minutes a year it takes to log into my account and enter an order? It isn't like TLH takes any time or effort.

I know people that will drive 5 minutes to a different gas station that is 3 cents a gallon cheaper.

User avatar
iceport
Posts: 4118
Joined: Sat Apr 07, 2007 4:29 pm

Re: Tax Loss Harvesting Worth it?

Post by iceport » Mon Jul 22, 2019 12:08 pm

AlohaJoe wrote:
Sun Jul 21, 2019 9:18 pm
understandingJH wrote:
Sat Jul 20, 2019 5:17 pm
Lastly, is TLH worth it?
Worth what? Worth the 5 minutes a year it takes to log into my account and enter an order? It isn't like TLH takes any time or effort.

I know people that will drive 5 minutes to a different gas station that is 3 cents a gallon cheaper.
I agree with this sentiment — just as long as a wash sale can be avoided. Once you introduce a wash sale, all that simplicity you described typically goes out the window.

The wash sale rule is confusing, if not in concept, certainly in practice, even in common situations. In fact, many situations require judgement and interpretation of vaguely defined rules that have never been clarified by the IRS. And even with a crystal clear understanding, wash sales usually result in a small accounting headache, and that alone seems to warrant reasonable measures to avoid.

A mere delay in claiming the loss is far from the worst case scenario. The disallowed loss is added to the cost basis of the replacement shares — except if the replacement shares are in an IRA. In that case, the loss is lost forever. Another way the loss can be lost forever is if you die before the replacement shares are sold, because the step-up in cost basis would apply anyway.

Even barring those worst case scenarios, you will not benefit from the disallowed loss until the replacement shares — with their increased cost bases — are sold. That might end up being decades from the tax loss harvesting date. And you'll have to document the increase in cost basis (and the reason for it) of the replacement shares and preserve that documentation for as long as you hold them. That's just a general PITA.

I created and documented a small wash sale in VTSAX back in 2008. I must maintain that documentation until I sell the affected replacement shares. At this point, it seems very possible that won't happen for many years, or even decades, if at all. Without that documentation, or if the shares are passed on to heirs, the tax-loss harvest is lost.

(And anyone who claims the newer brokerage reporting requirements will save them from the need for their own active involvement in the evaluation and documentation of wash sales does not understand the wash sale reporting requirements.)
"Discipline matters more than allocation.” ─William Bernstein

H-Town
Posts: 2107
Joined: Sun Feb 26, 2017 2:08 pm

Re: Tax Loss Harvesting Worth it?

Post by H-Town » Mon Jul 22, 2019 12:19 pm

understandingJH wrote:
Sat Jul 20, 2019 5:17 pm
Lastly, is TLH worth it? I'm in the 15% capital gains bracket. It's my understanding that TLH defers taxes to the future due to a lower cost basis on the shares sold and then bought. Does this mean that each year I take the full TLH benefit it's like contributing $3000 to a tax-deferred account?
Run the calculation through excel and you'll have your answer.

Not only you offset any capital gain in current year, but you will also be able to take $3k deduction to your AGI. It's like the IRS gives you interest free loan, with a possibility of not having to pay back the principal altogether.

Greenman72
Posts: 359
Joined: Fri Nov 01, 2013 2:17 pm

Re: Tax Loss Harvesting Worth it?

Post by Greenman72 » Mon Jul 22, 2019 1:16 pm

abuss368 wrote:
Sat Jul 20, 2019 11:32 pm
Not sure. Jack Bogle never really recommended it that I am aware of.
Believe it or not--Jack Bogle is not the only person in the world. There are other people in the world of personal finance and investing that have a lot of really smart things to say.

IMHO - There's nothing wrong with TLH, but it's generally a waste of time, especially if you're investing in big, broad-based index funds or ETF's. Assuming that you're using the famous 3-fund portfolio (or some similar variant) and you rebalance with cash flows, then you probably don't have any realized gains to offset. And even then, you're not actually "saving" any tax--you're just kicking the can down the road, because all you've done is artifically lower your basis.

That said, if/when we ever have another 2018, then a massive TLH would reduce your taxable income by $3,000 per year for...basically forever. (Assuming that you don't realize a lot of capital gains.)

But to properly do a TLH, you'll have to time the market correctly. You have to sell it and wait 31 days to buy it again. If you time it wrong and the market rebounds during those 31 days, you'll have lost just as much as you saved on taxes. (Alternatively, you could just buy another identical fund. EG - sell the Vanguard S&P 500 fund and buy the Fidelity S&P 500 fund.)

deltaneutral83
Posts: 1341
Joined: Tue Mar 07, 2017 4:25 pm

Re: Tax Loss Harvesting Worth it?

Post by deltaneutral83 » Mon Jul 22, 2019 1:22 pm

iceport wrote:
Mon Jul 22, 2019 12:08 pm

I agree with this sentiment — just as long as a wash sale can be avoided. Once you introduce a wash sale, all that simplicity you described typically goes out the window.

The wash sale rule is confusing, if not in concept, certainly in practice, even in common situations. In fact, many situations require judgement and interpretation of vaguely defined rules that have never been clarified by the IRS. And even with a crystal clear understanding, wash sales usually result in a small accounting headache, and that alone seems to warrant reasonable measures to avoid.

A mere delay in claiming the loss is far from the worst case scenario. The disallowed loss is added to the cost basis of the replacement shares — except if the replacement shares are in an IRA. In that case, the loss is lost forever. Another way the loss can be lost forever is if you die before the replacement shares are sold, because the step-up in cost basis would apply anyway.

Even barring those worst case scenarios, you will not benefit from the disallowed loss until the replacement shares — with their increased cost bases — are sold. That might end up being decades from the tax loss harvesting date. And you'll have to document the increase in cost basis (and the reason for it) of the replacement shares and preserve that documentation for as long as you hold them. That's just a general PITA.

I created and documented a small wash sale in VTSAX back in 2008. I must maintain that documentation until I sell the affected replacement shares. At this point, it seems very possible that won't happen for many years, or even decades, if at all. Without that documentation, or if the shares are passed on to heirs, the tax-loss harvest is lost.

(And anyone who claims the newer brokerage reporting requirements will save them from the need for their own active involvement in the evaluation and documentation of wash sales does not understand the wash sale reporting requirements.)
I'm kind of curious, given that we have numerous comments on "vagueness" of the IRS to define a wash sale outside of identical single stocks, have we had any threads where someone claimed a loss on something like one S&P 500 index and then bought another, tried to report the first as a loss, and then have the IRS come in and disallow? I see more issues with people not having the certainty on some potential TLHing. It's almost as if the IRS non committal nature on what exactly is a wash sale is more of a hot topic than the wash sale itself. This of course does not apply to single stocks when an obvious wash sale has taken place.

BuckyBadger
Posts: 1017
Joined: Tue Nov 01, 2011 11:28 am

Re: Tax Loss Harvesting Worth it?

Post by BuckyBadger » Mon Jul 22, 2019 1:29 pm

I do not. I have an extremely low-maintenance simple three(ish) fund portfolio. I have a taxable account invested completely in Total International Stock. My taxable account is maybe 10-20% of my overall portfolio.

It's just a bridge I haven't crossed. I figure if I do everything *mostly* right, then this one little thing isn't going to kill me.

I've decided that even if it isn't ideal, that it's close enough and easy enough that it's worth it for me.

Greenman72
Posts: 359
Joined: Fri Nov 01, 2013 2:17 pm

Re: Tax Loss Harvesting Worth it?

Post by Greenman72 » Mon Jul 22, 2019 1:41 pm

deltaneutral83 wrote:
Mon Jul 22, 2019 1:22 pm


I'm kind of curious, given that we have numerous comments on "vagueness" of the IRS to define a wash sale outside of identical single stocks, have we had any threads where someone claimed a loss on something like one S&P 500 index and then bought another, tried to report the first as a loss, and then have the IRS come in and disallow? I see more issues with people not having the certainty on some potential TLHing. It's almost as if the IRS non committal nature on what exactly is a wash sale is more of a hot topic than the wash sale itself. This of course does not apply to single stocks when an obvious wash sale has taken place.
You're right about that--the IRS has given scant little guidance on what qualifies. I'm a CPA, and this is my position.

I only consider something a wash sale if it's a sale/repurchase of the exact same security, or different classes of the same security.

So if you sold the Vanguard S&P 500 Investor shares and bought the Vanguard S&P 500 Admiral Shares, then I would consider that a wash sale.

If you sold the Vanguard S&P 500 shares and bought the iShares S&P 500 shares, I would NOT consider that a wash sale.

livesoft
Posts: 68606
Joined: Thu Mar 01, 2007 8:00 pm

Re: Tax Loss Harvesting Worth it?

Post by livesoft » Mon Jul 22, 2019 1:44 pm

iceport wrote:
Mon Jul 22, 2019 12:08 pm
I created and documented a small wash sale in VTSAX back in 2008. I must maintain that documentation until I sell the affected replacement shares [give those shares away to charity].
There, I fixed that for you. :)
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
iceport
Posts: 4118
Joined: Sat Apr 07, 2007 4:29 pm

Re: Tax Loss Harvesting Worth it?

Post by iceport » Mon Jul 22, 2019 1:48 pm

deltaneutral83 wrote:
Mon Jul 22, 2019 1:22 pm
iceport wrote:
Mon Jul 22, 2019 12:08 pm

I agree with this sentiment — just as long as a wash sale can be avoided. Once you introduce a wash sale, all that simplicity you described typically goes out the window.

The wash sale rule is confusing, if not in concept, certainly in practice, even in common situations. In fact, many situations require judgement and interpretation of vaguely defined rules that have never been clarified by the IRS. And even with a crystal clear understanding, wash sales usually result in a small accounting headache, and that alone seems to warrant reasonable measures to avoid.

A mere delay in claiming the loss is far from the worst case scenario. The disallowed loss is added to the cost basis of the replacement shares — except if the replacement shares are in an IRA. In that case, the loss is lost forever. Another way the loss can be lost forever is if you die before the replacement shares are sold, because the step-up in cost basis would apply anyway.

Even barring those worst case scenarios, you will not benefit from the disallowed loss until the replacement shares — with their increased cost bases — are sold. That might end up being decades from the tax loss harvesting date. And you'll have to document the increase in cost basis (and the reason for it) of the replacement shares and preserve that documentation for as long as you hold them. That's just a general PITA.

I created and documented a small wash sale in VTSAX back in 2008. I must maintain that documentation until I sell the affected replacement shares. At this point, it seems very possible that won't happen for many years, or even decades, if at all. Without that documentation, or if the shares are passed on to heirs, the tax-loss harvest is lost.

(And anyone who claims the newer brokerage reporting requirements will save them from the need for their own active involvement in the evaluation and documentation of wash sales does not understand the wash sale reporting requirements.)
I'm kind of curious, given that we have numerous comments on "vagueness" of the IRS to define a wash sale outside of identical single stocks, have we had any threads where someone claimed a loss on something like one S&P 500 index and then bought another, tried to report the first as a loss, and then have the IRS come in and disallow? I see more issues with people not having the certainty on some potential TLHing. It's almost as if the IRS non committal nature on what exactly is a wash sale is more of a hot topic than the wash sale itself. This of course does not apply to single stocks when an obvious wash sale has taken place.
No, to my knowledge that type of IRS ruling has not happened... yet. It seems that some folks here take that as some sort of implicit smoke signal concerning the nuances of the wash sale rule.

I emphatically disagree with that conclusion. I think one should be careful not to conflate the (lack of) enforcement of the wash sale rules with what the wash sale rules actually dictate.
"Discipline matters more than allocation.” ─William Bernstein

User avatar
iceport
Posts: 4118
Joined: Sat Apr 07, 2007 4:29 pm

Re: Tax Loss Harvesting Worth it?

Post by iceport » Mon Jul 22, 2019 1:48 pm

livesoft wrote:
Mon Jul 22, 2019 1:44 pm
iceport wrote:
Mon Jul 22, 2019 12:08 pm
I created and documented a small wash sale in VTSAX back in 2008. I must maintain that documentation until I sell the affected replacement shares [give those shares away to charity].
There, I fixed that for you. :)
Same time frame. 8-)
"Discipline matters more than allocation.” ─William Bernstein

Chris K Jones
Posts: 251
Joined: Sat Jan 20, 2018 6:54 pm

Re: Tax Loss Harvesting Worth it?

Post by Chris K Jones » Mon Jul 22, 2019 1:51 pm

It is definitely worth it. I had a big loss on actively traded small cap value mutual fund which I TLHd to Vanguard Small Cap Value index. I had a loss of 90,000 or so. Any losses in excess of gains cancel out up to $3000 in ordinary income each year. It is definitely worth doing. Since 2009, has saved me over $10,000 in taxes.

deltaneutral83
Posts: 1341
Joined: Tue Mar 07, 2017 4:25 pm

Re: Tax Loss Harvesting Worth it?

Post by deltaneutral83 » Mon Jul 22, 2019 1:54 pm

Greenman72 wrote:
Mon Jul 22, 2019 1:41 pm
deltaneutral83 wrote:
Mon Jul 22, 2019 1:22 pm


I'm kind of curious, given that we have numerous comments on "vagueness" of the IRS to define a wash sale outside of identical single stocks, have we had any threads where someone claimed a loss on something like one S&P 500 index and then bought another, tried to report the first as a loss, and then have the IRS come in and disallow? I see more issues with people not having the certainty on some potential TLHing. It's almost as if the IRS non committal nature on what exactly is a wash sale is more of a hot topic than the wash sale itself. This of course does not apply to single stocks when an obvious wash sale has taken place.
You're right about that--the IRS has given scant little guidance on what qualifies. I'm a CPA, and this is my position.

I only consider something a wash sale if it's a sale/repurchase of the exact same security, or different classes of the same security.

So if you sold the Vanguard S&P 500 Investor shares and bought the Vanguard S&P 500 Admiral Shares, then I would consider that a wash sale.

If you sold the Vanguard S&P 500 shares and bought the iShares S&P 500 shares, I would NOT consider that a wash sale.
And this herein lies the confusion. If we have people in the business that are still not clear because the IRS doesn't come in and lay out the rules, then how does the average DIY'er come in and act? We don't even have a lot of data points on BH about the IRS coming in and laying the boom down on swapping different/similar indexes ( as mentioned the i shares S&P and/or Vanguards' S&P). But I guess tomorrow could be the day that the SEC comes out with a three ring binder 5 inches thick of all index funds and their "substantially identical" partners. Who knows?

Greenman72
Posts: 359
Joined: Fri Nov 01, 2013 2:17 pm

Re: Tax Loss Harvesting Worth it?

Post by Greenman72 » Mon Jul 22, 2019 2:29 pm

For the record, don't feel bad about being confused. If you sat in a room with ten CPA's and asked them their opinion on this question, you would probably get ten different opinions. I know, because I WAS in the room (at a CPE event) last year when this question was asked, and it caused quite a debate.

bradpevans
Posts: 595
Joined: Sun Apr 08, 2018 1:09 pm

Re: Tax Loss Harvesting Worth it?

Post by bradpevans » Mon Jul 22, 2019 3:33 pm

If losses go against INCOME, then its more worthwhile, effectively "hedging" between Marginal Tax Rate and LTCG rate.
(But selling at the loss then re-establishes the basis at that lower value, so the gains start from there.)

If you can live at low enough income levels at some, you can get LTCG rate = 0%, so that works even better.

On the reinvested dividends, that's probably a very small number of shares compared to the total.
I may be wrong, but those few shares (or all dividend reinvest shares) complicate the wash sale (or dilute it),
but they don't completely stop you:


from: https://www.thestreet.com/story/1007776 ... nerds.html

Q. If I sell 1,000 shares at a loss, then five days later buy back 10 shares via the dividend reinvestment, can I only claim the loss on 990 of the 1,000 shares? Surely my intent here is not to create the kind of loss that wash-sale rules are intended to prohibit.

Thanks.


A. Sorry, but in this instance the IRS doesn't care much about intent. If you redeem fund shares at a loss within 30 days before or after a dividend distribution is reinvested into your account, a wash sale results, and the portion of the loss allocable to the reinvestment is not deductible. As noted earlier, the disallowed loss is actually deferred, as it is added to the cost basis of the replacement shares and will affect the computation of gain or loss on a later sale.

So in your case, you're correct in that you'd only be able to claim a loss on 990 of the 1,000 shares you sold. But let's say you have a $25 loss on each of those shares. That $25-per-share disallowed loss will be added to your basis in the 10 new shares purchased via your automatic dividend reinvestment plan. Since your basis will be $25 higher than what you actually paid, you'll still get a tax break -- just not immediately. Rather, when you sell those shares, either your gain will be lower (meaning lower capital gains tax) or your loss will be greater (meaning a larger deduction). So while this may be small consolation, know that the loss is still there, in your portfolio -- it's just not on your 1040. Yet.

User avatar
LinusP
Posts: 179
Joined: Fri May 18, 2018 10:29 am

Re: Tax Loss Harvesting Worth it?

Post by LinusP » Mon Jul 22, 2019 4:20 pm

Greenman72 wrote:
Mon Jul 22, 2019 1:16 pm
IMHO - There's nothing wrong with TLH, but it's generally a waste of time, especially if you're investing in big, broad-based index funds or ETF's. Assuming that you're using the famous 3-fund portfolio (or some similar variant) and you rebalance with cash flows, then you probably don't have any realized gains to offset. And even then, you're not actually "saving" any tax--you're just kicking the can down the road, because all you've done is artifically lower your basis.
I'm not sure why you're conflating rebalancing with tax loss harvesting - they're two separate things. Yes, it's often possible to rebalance purely with cash flows - but one can still harvest losses by exchanging to similar-but-not-identical funds (as you point out later) with minimal changes to overall asset allocation.
Greenman72 wrote:
Mon Jul 22, 2019 1:16 pm
But to properly do a TLH, you'll have to time the market correctly. You have to sell it and wait 31 days to buy it again. If you time it wrong and the market rebounds during those 31 days, you'll have lost just as much as you saved on taxes. (Alternatively, you could just buy another identical fund. EG - sell the Vanguard S&P 500 fund and buy the Fidelity S&P 500 fund.)
There's no need to time the market to tax loss harvest "correctly" - just do a little research about TLH "partners" and do an exchange. People get concerned about wash sales, but I think livesoft's take (that they're just not a big deal) is imminently reasonable.

There's certainly a variety of opinions around here, but it seems like most people regard any pair of funds tracking different benchmarks to not be "substantially identical," and hence be good TLH partners. Your example of moving from an S&P 500 fund at Vanguard to one at Fidelity could well be considered substantially identical by the IRS (though as pointed out, without guidance, we just don't know).

H-Town
Posts: 2107
Joined: Sun Feb 26, 2017 2:08 pm

Re: Tax Loss Harvesting Worth it?

Post by H-Town » Mon Jul 22, 2019 4:36 pm

Greenman72 wrote:
Mon Jul 22, 2019 1:41 pm
deltaneutral83 wrote:
Mon Jul 22, 2019 1:22 pm


I'm kind of curious, given that we have numerous comments on "vagueness" of the IRS to define a wash sale outside of identical single stocks, have we had any threads where someone claimed a loss on something like one S&P 500 index and then bought another, tried to report the first as a loss, and then have the IRS come in and disallow? I see more issues with people not having the certainty on some potential TLHing. It's almost as if the IRS non committal nature on what exactly is a wash sale is more of a hot topic than the wash sale itself. This of course does not apply to single stocks when an obvious wash sale has taken place.
You're right about that--the IRS has given scant little guidance on what qualifies. I'm a CPA, and this is my position.

I only consider something a wash sale if it's a sale/repurchase of the exact same security, or different classes of the same security.

So if you sold the Vanguard S&P 500 Investor shares and bought the Vanguard S&P 500 Admiral Shares, then I would consider that a wash sale.

If you sold the Vanguard S&P 500 shares and bought the iShares S&P 500 shares, I would NOT consider that a wash sale.
This is where I draw the line. If two funds track the same index, it's a direct violation against "substantially identical" language. Just because the IRS does not provide guidance, it doesn't mean that the IRS won't assess back taxes during an audit.

Greenman72
Posts: 359
Joined: Fri Nov 01, 2013 2:17 pm

Re: Tax Loss Harvesting Worth it?

Post by Greenman72 » Mon Jul 22, 2019 9:43 pm

^Maybe so. But as a tax preparer, who should I advocate for? The IRS? Or the client?

Unlike most people who want to pontificate obscure IRS rulings on an anonymous website, I actually have to face this very question on a near-daily basis. This is my job. Not a hobby. And that is what I have decided.

If the IRS wants the rule to be more straightforward, then they should interpret it in a PLR or Memorandum or something. They have deliberately left it vague and open to interpretation.
Last edited by Greenman72 on Mon Jul 22, 2019 9:47 pm, edited 2 times in total.

Greenman72
Posts: 359
Joined: Fri Nov 01, 2013 2:17 pm

Re: Tax Loss Harvesting Worth it?

Post by Greenman72 » Mon Jul 22, 2019 9:45 pm

Also, read the prospectuses of the major S&P 500 index funds. How many securities do they own? (hint - it’s not 500). How often do they reinvest/pay out dividends? Do they hypothecate shares or engage in other types of derivatives?

You might find out that they are more different than you think.

Small Savanna
Posts: 142
Joined: Sat Feb 09, 2019 2:27 am

Re: Tax Loss Harvesting Worth it?

Post by Small Savanna » Mon Jul 22, 2019 10:05 pm

I've done tax loss harvesting on individual stocks and it is occasionally worthwhile. You get the most tax benefit from a short term loss, so it's worth keeping track of lots that are in the red and coming up to the one year mark. If you are still bullish about the company, buy back the shares either 31 days before or 31 days after you sell for a loss.

Of course, picking individual stocks is frowned on here, and I'm gradually coming around to that point of view...

User avatar
fortyofforty
Posts: 1655
Joined: Wed Mar 31, 2010 12:33 pm

Re: Tax Loss Harvesting Worth it?

Post by fortyofforty » Tue Jul 23, 2019 12:03 pm

I thought I read somewhere that the idea of experiencing a "loss" is to actually suffer some financial detriment. To purchase another replacement security, it must be something that is not preferred by the investor, for whatever reason. I can't find it right now, and it was explained much better than I have done here.
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

sc9182
Posts: 291
Joined: Wed Aug 17, 2016 7:43 pm

Re: Tax Loss Harvesting Worth it?

Post by sc9182 » Tue Jul 23, 2019 12:26 pm

One additional point along the lines of TLH: Traditional IRA to Roth IRA conversion (may be partial) during market downturns. heard/read many folks may have performed such conversions, during 2008/2009 time-frame.

User avatar
iceport
Posts: 4118
Joined: Sat Apr 07, 2007 4:29 pm

Re: Tax Loss Harvesting Worth it?

Post by iceport » Tue Jul 23, 2019 1:17 pm

H-Town wrote:
Mon Jul 22, 2019 4:36 pm
Greenman72 wrote:
Mon Jul 22, 2019 1:41 pm
If you sold the Vanguard S&P 500 shares and bought the iShares S&P 500 shares, I would NOT consider that a wash sale.
This is where I draw the line. If two funds track the same index, it's a direct violation against "substantially identical" language. Just because the IRS does not provide guidance, it doesn't mean that the IRS won't assess back taxes during an audit.
Greenman72 wrote:
Mon Jul 22, 2019 9:43 pm
^Maybe so. But as a tax preparer, who should I advocate for? The IRS? Or the client?

Unlike most people who want to pontificate obscure IRS rulings on an anonymous website, I actually have to face this very question on a near-daily basis. This is my job. Not a hobby. And that is what I have decided.

If the IRS wants the rule to be more straightforward, then they should interpret it in a PLR or Memorandum or something. They have deliberately left it vague and open to interpretation.
Okay, but isn't that vagueness and openness to interpretation a double edged sword? Doesn't that mean the IRS is just as free to interpret the wash sale rule as you are? And isn't their interpretation the only one that counts?

But backing up for a second, and leaving aside the question of whether exposing clients to potential liability (however minute that risk may be) is truly "advocating" for them, the question I have is this: why would you see any need to use a fund tracking the same index for a replacement fund?

As a small do-it-yourself individual investor, the vast multitude of indexes and index funds that track them available today have made it relative child's play to find a suitable replacement fund that performs "practically identically" (my term) as the fund sold at a loss, but that does not seem to cross over so blatantly into "substantially identical" territory as a fund tracking the identical index. I would think finding a such a suitable replacement fund would be even easier for a professional.

My understanding is that there was a short list of transactions considered "generally acceptable" to prevent a wash sale published in the Journal of Financial Planning a decade or so ago, and that list did not include swapping into a fund that tracks the same index. (More detail can be found in a prior post here.) Why would a professional see the need to push beyond this mainstream interpretation?

Selling a client's S&P 500 index fund for a loss? Okay, so why not pick from the dozen or more large cap blend funds that would fill the same role in the portfolio but that don't track the S&P 500 index? I just don't get it.
"Discipline matters more than allocation.” ─William Bernstein

User avatar
fortyofforty
Posts: 1655
Joined: Wed Mar 31, 2010 12:33 pm

Re: Tax Loss Harvesting Worth it?

Post by fortyofforty » Tue Jul 23, 2019 1:55 pm

I suspect that, as with many (most) internet discussions, this has gotten to the point of those few who push the envelope of legality or propriety. If you've participated in any discussion boards, it is quite common. There is almost no point in trying to determine the reason, because it will ultimately devolve to the simple: because it's there.

As a side and serious question, is there any IRS penalty imposed on a tax preparer for recommending something later disallowed by the IRS? The taxpayer gets hit with the tax owed, plus interest and penalties, I suspect. :?:
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

User avatar
sperry8
Posts: 1899
Joined: Sat Mar 29, 2008 9:25 pm
Location: Miami FL

Re: Tax Loss Harvesting Worth it?

Post by sperry8 » Tue Jul 23, 2019 2:09 pm

TLH is worth it for sure. Especially if you're in "index funds". During the 08/09 downturn I sold almost every fund I owned at a loss. I still have carryforwards I haven't used meaning I haven't paid 1 cent in capital gains taxes since then. This is the year I will actually use up all those TLH losses. Incredible savings over the past decade and I stayed invested the WHOLE time. yes, I had to rejigger my index funds a bit. In some cases I was out for a month waiting to get back in. But in a severe downturn like we saw in 08/09 it was worth it. Now who knows... perhaps during a melt up if you truly are out you'll be "harmed" in the short term. But I doubt it. Not really very many funds you can't find an alternate for that doesn't run afoul of wash sale rules. I'd say absolutely TLH.
BH contest results: 2018: #150 of 493 | 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

Greenman72
Posts: 359
Joined: Fri Nov 01, 2013 2:17 pm

Re: Tax Loss Harvesting Worth it?

Post by Greenman72 » Tue Jul 23, 2019 5:13 pm

iceport wrote:
Tue Jul 23, 2019 1:17 pm
H-Town wrote:
Mon Jul 22, 2019 4:36 pm
Greenman72 wrote:
Mon Jul 22, 2019 1:41 pm
If you sold the Vanguard S&P 500 shares and bought the iShares S&P 500 shares, I would NOT consider that a wash sale.
This is where I draw the line. If two funds track the same index, it's a direct violation against "substantially identical" language. Just because the IRS does not provide guidance, it doesn't mean that the IRS won't assess back taxes during an audit.
Greenman72 wrote:
Mon Jul 22, 2019 9:43 pm
^Maybe so. But as a tax preparer, who should I advocate for? The IRS? Or the client?

Unlike most people who want to pontificate obscure IRS rulings on an anonymous website, I actually have to face this very question on a near-daily basis. This is my job. Not a hobby. And that is what I have decided.

If the IRS wants the rule to be more straightforward, then they should interpret it in a PLR or Memorandum or something. They have deliberately left it vague and open to interpretation.
Okay, but isn't that vagueness and openness to interpretation a double edged sword? Doesn't that mean the IRS is just as free to interpret the wash sale rule as you are? And isn't their interpretation the only one that counts?

But backing up for a second, and leaving aside the question of whether exposing clients to potential liability (however minute that risk may be) is truly "advocating" for them, the question I have is this: why would you see any need to use a fund tracking the same index for a replacement fund?

As a small do-it-yourself individual investor, the vast multitude of indexes and index funds that track them available today have made it relative child's play to find a suitable replacement fund that performs "practically identically" (my term) as the fund sold at a loss, but that does not seem to cross over so blatantly into "substantially identical" territory as a fund tracking the identical index. I would think finding a such a suitable replacement fund would be even easier for a professional.

My understanding is that there was a short list of transactions considered "generally acceptable" to prevent a wash sale published in the Journal of Financial Planning a decade or so ago, and that list did not include swapping into a fund that tracks the same index. (More detail can be found in a prior post here.) Why would a professional see the need to push beyond this mainstream interpretation?

Selling a client's S&P 500 index fund for a loss? Okay, so why not pick from the dozen or more large cap blend funds that would fill the same role in the portfolio but that don't track the S&P 500 index? I just don't get it.
Sometimes, the IRS is very clear about the rules, and sometime they are vague. For instance, you cannot deduct investment management fees. Not on Schedule A, not "built-in" to the basis, not as "legal & professional" fees, not anywhere. They have issued a Technical Advice Memorandum that details that.

However, there is still some debate on whether or not you can 1031 into certain grantor trusts, like the Hugoton Royalty Trust. We have asked the IRS for guidance. People have requested private letter rulings, and the IRS has said that they will not issue a PLR on this issue. That means that it's open to interpretation. (Which means, in my mind, that they're getting ready to audit somebody on the issue.)

The IRS is intentionally vague on the issue of what is a "substantially identical" security. That means that it's open to interpretation. And I have interpreted it in a way that benefits my clients. If the IRS comes in and audits my client and tells me that my interpretation is wrong, then I'll cross that bridge when I get there. And you are certainly welcome to interpret the wash sale rule any way you see fit. I do not prepare your tax return, nor do I represent you in any way to the IRS.

And the Journal of Financial Planning is in no way authoritative--not on the IRS and not on me.

Greenman72
Posts: 359
Joined: Fri Nov 01, 2013 2:17 pm

Re: Tax Loss Harvesting Worth it?

Post by Greenman72 » Tue Jul 23, 2019 5:15 pm

fortyofforty wrote:
Tue Jul 23, 2019 1:55 pm
As a side and serious question, is there any IRS penalty imposed on a tax preparer for recommending something later disallowed by the IRS? The taxpayer gets hit with the tax owed, plus interest and penalties, I suspect. :?:
To be honest, I don't know what the penalties are. It has to be something pretty egregious and the IRS has to prove that it was intentional and fraudulent. If they went around penalizing every tax return preparer for every audit adjustment, there would be few tax preparers left in the world.

User avatar
fortyofforty
Posts: 1655
Joined: Wed Mar 31, 2010 12:33 pm

Re: Tax Loss Harvesting Worth it?

Post by fortyofforty » Tue Jul 23, 2019 5:33 pm

Greenman72 wrote:
Tue Jul 23, 2019 5:15 pm
fortyofforty wrote:
Tue Jul 23, 2019 1:55 pm
As a side and serious question, is there any IRS penalty imposed on a tax preparer for recommending something later disallowed by the IRS? The taxpayer gets hit with the tax owed, plus interest and penalties, I suspect. :?:
To be honest, I don't know what the penalties are. It has to be something pretty egregious and the IRS has to prove that it was intentional and fraudulent. If they went around penalizing every tax return preparer for every audit adjustment, there would be few tax preparers left in the world.
Or just a lot more cautious ones.
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

H-Town
Posts: 2107
Joined: Sun Feb 26, 2017 2:08 pm

Re: Tax Loss Harvesting Worth it?

Post by H-Town » Tue Jul 23, 2019 5:42 pm

Greenman72 wrote:
Tue Jul 23, 2019 5:15 pm
fortyofforty wrote:
Tue Jul 23, 2019 1:55 pm
As a side and serious question, is there any IRS penalty imposed on a tax preparer for recommending something later disallowed by the IRS? The taxpayer gets hit with the tax owed, plus interest and penalties, I suspect. :?:
To be honest, I don't know what the penalties are. It has to be something pretty egregious and the IRS has to prove that it was intentional and fraudulent. If they went around penalizing every tax return preparer for every audit adjustment, there would be few tax preparers left in the world.
Maybe the cost of losing the trust of your clients? Words travel fast, and it only takes one. I'm just curious... Why not recommend funds that track different index? For example: VOO versus VTI?

This is a grey area and I don't think exposing client to a potential backtax assessment is for the best interest of your clients. If my clients were to pursue that route, I wouldn't consider signing that return.

User avatar
iceport
Posts: 4118
Joined: Sat Apr 07, 2007 4:29 pm

Re: Tax Loss Harvesting Worth it?

Post by iceport » Tue Jul 23, 2019 6:16 pm

Greenman72 wrote:
Tue Jul 23, 2019 5:13 pm
iceport wrote:
Tue Jul 23, 2019 1:17 pm
H-Town wrote:
Mon Jul 22, 2019 4:36 pm
Greenman72 wrote:
Mon Jul 22, 2019 1:41 pm
If you sold the Vanguard S&P 500 shares and bought the iShares S&P 500 shares, I would NOT consider that a wash sale.
This is where I draw the line. If two funds track the same index, it's a direct violation against "substantially identical" language. Just because the IRS does not provide guidance, it doesn't mean that the IRS won't assess back taxes during an audit.
Greenman72 wrote:
Mon Jul 22, 2019 9:43 pm
^Maybe so. But as a tax preparer, who should I advocate for? The IRS? Or the client?

Unlike most people who want to pontificate obscure IRS rulings on an anonymous website, I actually have to face this very question on a near-daily basis. This is my job. Not a hobby. And that is what I have decided.

If the IRS wants the rule to be more straightforward, then they should interpret it in a PLR or Memorandum or something. They have deliberately left it vague and open to interpretation.
Okay, but isn't that vagueness and openness to interpretation a double edged sword? Doesn't that mean the IRS is just as free to interpret the wash sale rule as you are? And isn't their interpretation the only one that counts?

But backing up for a second, and leaving aside the question of whether exposing clients to potential liability (however minute that risk may be) is truly "advocating" for them, the question I have is this: why would you see any need to use a fund tracking the same index for a replacement fund?

As a small do-it-yourself individual investor, the vast multitude of indexes and index funds that track them available today have made it relative child's play to find a suitable replacement fund that performs "practically identically" (my term) as the fund sold at a loss, but that does not seem to cross over so blatantly into "substantially identical" territory as a fund tracking the identical index. I would think finding a such a suitable replacement fund would be even easier for a professional.

My understanding is that there was a short list of transactions considered "generally acceptable" to prevent a wash sale published in the Journal of Financial Planning a decade or so ago, and that list did not include swapping into a fund that tracks the same index. (More detail can be found in a prior post here.) Why would a professional see the need to push beyond this mainstream interpretation?

Selling a client's S&P 500 index fund for a loss? Okay, so why not pick from the dozen or more large cap blend funds that would fill the same role in the portfolio but that don't track the S&P 500 index? I just don't get it.
Sometimes, the IRS is very clear about the rules, and sometime they are vague. For instance, you cannot deduct investment management fees. Not on Schedule A, not "built-in" to the basis, not as "legal & professional" fees, not anywhere. They have issued a Technical Advice Memorandum that details that.

However, there is still some debate on whether or not you can 1031 into certain grantor trusts, like the Hugoton Royalty Trust. We have asked the IRS for guidance. People have requested private letter rulings, and the IRS has said that they will not issue a PLR on this issue. That means that it's open to interpretation. (Which means, in my mind, that they're getting ready to audit somebody on the issue.)

The IRS is intentionally vague on the issue of what is a "substantially identical" security. That means that it's open to interpretation. And I have interpreted it in a way that benefits my clients. If the IRS comes in and audits my client and tells me that my interpretation is wrong, then I'll cross that bridge when I get there. And you are certainly welcome to interpret the wash sale rule any way you see fit. I do not prepare your tax return, nor do I represent you in any way to the IRS.

And the Journal of Financial Planning is in no way authoritative--not on the IRS and not on me.
Fair enough. However, you offer no rationale whatsoever for the need to use a replacement fund tracking an identical index in the first place. Deviating from the mainstream interpretation just seems completely unnecessary to me. The generally accepted wash sale loophole (for avoiding the "substantially identical" test) is as big as a barn door. The need to scrape the sides of that barn door is beyond me.
"Discipline matters more than allocation.” ─William Bernstein

User avatar
abuss368
Posts: 16056
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Tax Loss Harvesting Worth it?

Post by abuss368 » Tue Jul 23, 2019 7:03 pm

Greenman72 wrote:
Mon Jul 22, 2019 1:16 pm
Believe it or not--Jack Bogle is not the only person in the world. There are other people in the world of personal finance and investing that have a lot of really smart things to say.
I understand but that may be be as relevant considering the website is "Investing Advice Inspired by Jack Bogle".
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

placeholder
Posts: 4021
Joined: Tue Aug 06, 2013 12:43 pm

Re: Tax Loss Harvesting Worth it?

Post by placeholder » Wed Jul 31, 2019 12:49 am

H-Town wrote:
Mon Jul 22, 2019 4:36 pm
This is where I draw the line. If two funds track the same index, it's a direct violation against "substantially identical" language.
That is your opinion but certainly not an IRS published position and not every agrees with you such as this guy:

viewtopic.php?t=203816#p3124275

User avatar
Doc
Posts: 9241
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Tax Loss Harvesting Worth it?

Post by Doc » Wed Jul 31, 2019 9:48 am

The "substantially identical" question is largely irrelevant if you have a tax advantaged account.

Say you want to TLH a S&P500 fund. Simply sell the fund and buy an intermediate term bond fund in your taxable account. In you tax advantaged account sell some of your TBM fund and buy a Total Stock Market fund. In 31 days reverse your trades. Any difference in returns will be miniscule.

Your S&P500 fund is in no way substantially identical to a Total Stock Market fund. Ditto with the two bond funds.
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.

Finridge
Posts: 668
Joined: Mon May 16, 2011 7:27 pm

Re: Tax Loss Harvesting Worth it?

Post by Finridge » Wed Jul 31, 2019 12:53 pm

livesoft wrote:
Sat Jul 20, 2019 5:41 pm

But you should be comfortable creating a wash sale within your taxable account where the loss is only temporarily disallowed and essentially deferred. Don't be intimidated by folks on this forum who don't understand wash sales.
Could you explain this a bit more? Thanks!

User avatar
Doc
Posts: 9241
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Tax Loss Harvesting Worth it?

Post by Doc » Wed Jul 31, 2019 1:36 pm

Finridge wrote:
Wed Jul 31, 2019 12:53 pm
livesoft wrote:
Sat Jul 20, 2019 5:41 pm

But you should be comfortable creating a wash sale within your taxable account where the loss is only temporarily disallowed and essentially deferred. Don't be intimidated by folks on this forum who don't understand wash sales.
Could you explain this a bit more? Thanks!
The loss is disallowed for now but the cost basis of the replacement shares is increased by the amount of the disallowed loss. So when you eventually sell the replacement shares the "loss" comes back.

But be careful not to have the replacement shares in your tax advantaged account because then the loss is forever.
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.

User avatar
Doc
Posts: 9241
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Tax Loss Harvesting Worth it?

Post by Doc » Wed Jul 31, 2019 1:39 pm

For a good discussion of the wash sale cunnumdrum see Fairmark's "Wash Sales 101".

https://fairmark.com/investment-taxatio ... sales-101/
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.

Finridge
Posts: 668
Joined: Mon May 16, 2011 7:27 pm

Re: Tax Loss Harvesting Worth it?

Post by Finridge » Thu Aug 01, 2019 3:57 pm

Doc wrote:
Wed Jul 31, 2019 1:36 pm
Finridge wrote:
Wed Jul 31, 2019 12:53 pm
livesoft wrote:
Sat Jul 20, 2019 5:41 pm

But you should be comfortable creating a wash sale within your taxable account where the loss is only temporarily disallowed and essentially deferred. Don't be intimidated by folks on this forum who don't understand wash sales.
Could you explain this a bit more? Thanks!
The loss is disallowed for now but the cost basis of the replacement shares is increased by the amount of the disallowed loss. So when you eventually sell the replacement shares the "loss" comes back.

But be careful not to have the replacement shares in your tax advantaged account because then the loss is forever.
Thanks! That is very helpful!
Doc wrote:
Wed Jul 31, 2019 1:39 pm
For a good discussion of the wash sale cunnumdrum see Fairmark's "Wash Sales 101".

https://fairmark.com/investment-taxatio ... sales-101/
This is also very helpful. Thanks!

livesoft
Posts: 68606
Joined: Thu Mar 01, 2007 8:00 pm

Re: Tax Loss Harvesting Worth it?

Post by livesoft » Thu Aug 01, 2019 4:01 pm

In order to see how all this plays out on your tax forms, there is this thread:
Real-life, real-time wash sale & TLH documented
Wiki This signature message sponsored by sscritic: Learn to fish.

H-Town
Posts: 2107
Joined: Sun Feb 26, 2017 2:08 pm

Re: Tax Loss Harvesting Worth it?

Post by H-Town » Thu Aug 01, 2019 4:02 pm

Doc wrote:
Wed Jul 31, 2019 9:48 am
The "substantially identical" question is largely irrelevant if you have a tax advantaged account.

Say you want to TLH a S&P500 fund. Simply sell the fund and buy an intermediate term bond fund in your taxable account. In you tax advantaged account sell some of your TBM fund and buy a Total Stock Market fund. In 31 days reverse your trades. Any difference in returns will be miniscule.

Your S&P500 fund is in no way substantially identical to a Total Stock Market fund. Ditto with the two bond funds.
Interesting mechanic with using tax advantaged account. This way you don't have to hold on ETFs of a different company that you don't really like.

User avatar
iceport
Posts: 4118
Joined: Sat Apr 07, 2007 4:29 pm

Re: Tax Loss Harvesting Worth it?

Post by iceport » Thu Aug 01, 2019 4:14 pm

H-Town wrote:
Thu Aug 01, 2019 4:02 pm
Doc wrote:
Wed Jul 31, 2019 9:48 am
The "substantially identical" question is largely irrelevant if you have a tax advantaged account.

Say you want to TLH a S&P500 fund. Simply sell the fund and buy an intermediate term bond fund in your taxable account. In you tax advantaged account sell some of your TBM fund and buy a Total Stock Market fund. In 31 days reverse your trades. Any difference in returns will be miniscule.

Your S&P500 fund is in no way substantially identical to a Total Stock Market fund. Ditto with the two bond funds.
Interesting mechanic with using tax advantaged account. This way you don't have to hold on ETFs of a different company that you don't really like.
I don't understand how the described use of a tax advantaged account makes the "substantially identical" question "largely irrelevant." The example clearly complies with the wash sale rule by evaluating whether the funds are "substantially identical." If they were, a wash sale could be involved. How is the "substantially Identical" question irrelevant?

What the use of the tax advantaged account *does* do is allow you to never get stuck in a taxable account with a fund you wouldn't want to own long term — which is a worthwhile endeavor.
"Discipline matters more than allocation.” ─William Bernstein

User avatar
Doc
Posts: 9241
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Tax Loss Harvesting Worth it?

Post by Doc » Thu Aug 01, 2019 4:40 pm

iceport wrote:
Thu Aug 01, 2019 4:14 pm
I don't understand how the described use of a tax advantaged account makes the "substantially identical" question "largely irrelevant." The example clearly complies with the wash sale rule by evaluating whether the funds are "substantially identical." If they were, a wash sale could be involved. How is the "substantially Identical" question irrelevant?
In my example I sold a S&P 500 fund and bought a total stock market fund. Even the guv would be hard pressed to say that a fund holding 500 stocks is substantially identical to one holding 3600 stocks.

The point of doing the buy in your tax advantaged account is that you can reverse the position after 30 days and get back to your original desired position. If you bought the replacement fund in your taxable account you might have a short term capital gain 30 days from now and you would have to pay tax on that gain. Alternately you just keep the replacement fund which means you changed your position. If you are OK with being "stuck" with a total market fund instead of a 500 fund that's your decision.

Last time I played this game I was replacing a small foreign with a large foreign fund. That's OK for 30 days but I wouldn't want to be in that position for 30 months or longer.
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.

Locked