Tax Loss Harvesting Worth it?

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ivk5
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Re: Tax Loss Harvesting Worth it?

Post by ivk5 » Fri Aug 09, 2019 6:12 am

Greenman72 wrote:
Fri Aug 09, 2019 6:04 am
fortyofforty wrote:
Thu Aug 08, 2019 5:58 pm
...how about investments owned by a husband and investments owned by a wife, in their names only, in separate accounts. Then, husband sells at a loss and wife buys same exact investment in her individual account. Wash sale? Allowed by IRS? :confused
The husband and wife are (presumably) one taxpayer. A sale by the husband and simultaneous purchase by the wife would be considered a wash sale. Again, it's highly unlikely that anybody would ever pick that up, though.

And I don't know why people are arguing about a wash sale inside a 401k. The law says that the sale has to create a tax deduction to be considered a wash sale. A sale of a fund inside a 401k or IRA does not create any kind of tax deduction. For tax purposes, that isn't even a transaction. For 401k's and IRA's, the IRS only cares about cash flows into or out of the plan.
The endlessly debated question is whether a purchase in a 401k needs to be taken into consideration to determine if a loss in a taxable account is a wash sale.

dcabler
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Re: Tax Loss Harvesting Worth it?

Post by dcabler » Fri Aug 09, 2019 6:45 am

MathIsMyWayr wrote:
Thu Aug 08, 2019 9:56 pm
dcabler wrote:
Thu Aug 08, 2019 8:50 am
Since then, it's been opportunistic, mainly with two views
1) I have a couple funds that I no longer want, but with so much capital gains in them that I don't want a tax hit to sell them. Neither fund is so horrible or so far away from my goals that I think I should take the tax hit today and move on. So any dividends/cap gains they produce now are redirected elsewhere. It's a lot like slowly turning around an oil tanker. But some day, there will be enough of a downturn that I'll be able to sell at least some of the lots, or I'll be retired with a different tax profile.
Are you holding on to the funds with so much capital gains with the hope of TLH in a big downturn? Isn't it better to sell at gain and pay tax rather than to lose money and TLH?
I'm not. Again, neither fund's investment approach is so far away from my desired fund types that they are worth selling and taking a tax hit. I should have been more clear: If they were far off from my desired fund types and they represented a big enough proportion of my portfolio, I would probably gradually sell them over time. But they're not. IF there is a downturn that results in some shares going below water, I'll take advantage of it. Otherwise, they'll be sold when I'm retired and in a lower overall bracket.

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iceport
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Re: Tax Loss Harvesting Worth it?

Post by iceport » Fri Aug 09, 2019 9:46 am

MathIsMyWayr wrote:
Thu Aug 08, 2019 9:56 pm
dcabler wrote:
Thu Aug 08, 2019 8:50 am
Since then, it's been opportunistic, mainly with two views
1) I have a couple funds that I no longer want, but with so much capital gains in them that I don't want a tax hit to sell them. Neither fund is so horrible or so far away from my goals that I think I should take the tax hit today and move on. So any dividends/cap gains they produce now are redirected elsewhere. It's a lot like slowly turning around an oil tanker. But some day, there will be enough of a downturn that I'll be able to sell at least some of the lots, or I'll be retired with a different tax profile.
Are you holding on to the funds with so much capital gains with the hope of TLH in a big downturn? Isn't it better to sell at gain and pay tax rather than to lose money and TLH?
MathIsMyWayr,

I'm not sure what you mean by "lose money."

The way TLH is typically advocated around here, a suitable replacement fund that performs practically the same as the fund sold at a loss but that is not "substantially identical" is used to stay invested. If successful, there's no appreciable difference in performance between staying invested in the losing fund and selling it to realize the capital loss and exchanging into a new fund.

In this scenario, it's far better to sell at a loss and reduce the overall tax burden than sell at a gain and add to the tax burden. dcabler's plan makes perfect sense to me.
"Discipline matters more than allocation.” ─William Bernstein

rkhusky
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Re: Tax Loss Harvesting Worth it?

Post by rkhusky » Fri Aug 09, 2019 11:42 am

Lee_WSP wrote:
Thu Aug 08, 2019 9:34 pm
rkhusky wrote:
Thu Aug 08, 2019 9:23 pm
Lee_WSP wrote:
Thu Aug 08, 2019 6:51 pm
rkhusky wrote:
Thu Aug 08, 2019 6:49 pm
placeholder wrote:
Thu Aug 08, 2019 6:03 pm
The choices and timing of purchases in 401ks are largely not under the control of the taxpayer and that is the difference from other trusts like the one described in the court case and IRAs.
The opposite is actually true - the taxpayer largely has control over the choices and timing of purchases in their 401k's. While there may be some differences in relation to IRA's, there is no indication that the IRS considers those differences to be of sufficient importance to exempt 401k's from the wash sale rule. That argument is just concocted out of thin air by those who want to use their 401k's to circumvent the wash sale rule.
Not true. The taxpayer must choose at the beginning of the year how much the employer will withdraw from her paycheck. The employer decides whether employee gets to change this choice more than once per year.
Then the taxpayer should choose a different fund in their 401k compared to their taxable account. Then all that is irrelevant.
Are we arguing why something should be or the rationale behind a possible IRS guidance?

I'm not sure what the original person's quote is, but if it is an IRS letter, then that is the rationale behind why a 401k is treated differently. If we're arguing hypotheticals, I don't have a dog in this fight.
The wash sale statute uses the phrase "the taxpayer has acquired". The discussion is what is meant by "the taxpayer". Some people thought that trusts were different than "the taxpayer" and used them in an effort to avoid wash sales, so they didn't have to acquire an investment that was not "substantially identical" to their investment sold for a loss. The IRS ruled that trusts were the same as "the taxpayer" in regard to wash sales. In 2008, the IRS ruled that IRA's were the same as "the taxpayer", again after taxpayers began using them to avoid wash sales without buying replacement investments that were not "substantially identical". In tax publications, the IRS has said that a spouse is the same as "the taxpayer" in regards to wash sales, as are corporations that the taxpayer controls. In every instance, the IRS has ruled or published that an entity that the taxpayer controls is subject to the wash sale rule.

In the 2008 ruling on IRA's, the IRS did not mention 401k's, which some people believe means that 401k's are therefore exempt from wash sale rules, i.e. one is free to purchase "substantially identical" investments in your 401k to replace investments for which you are claiming a realized loss on your taxes. But the IRS has never exempted any type of account from wash sale rules, nor provided any measure of control that would exempt an account type from wash sale rules.

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Re: Tax Loss Harvesting Worth it?

Post by JediMisty » Fri Aug 09, 2019 12:11 pm

I did TLH in 2018 to stay under the MAGI threshold to qualify for a ROTH IRA contribution. I had in previous years taken some weeks off without pay, but the 401k matching and calculations toward vacation at the Megacorp which bought my Megacorp made this practice less worthwhile. Working a full year and high capital gains thrown off of my taxable accounts put me over the income limits for a Roth contribution. I have large IRAs, so the backdoor Roth isn't available to me with a lot of transfers. I'm already maxing out the MBR in my 401k so was hoping to make the Roth contribution.

One could argue that taking this step for a Roth contribution that is less than 1% of my portfolio value is trivial, especially given that I had already contributed the max (including after tax) to my 401k. I expect I'll be (forced to) retire soon, so I want to take advantage of every dollar of tax advantage savings.

placeholder
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Re: Tax Loss Harvesting Worth it?

Post by placeholder » Fri Aug 09, 2019 12:46 pm

fortyofforty wrote:
Fri Aug 09, 2019 6:00 am
If I can tell my employer to move money at least between a stock fund and a bond fund, along with ongoing investments into those funds, then I'd say I had control over the investments therein. But that's just how I see it.
At best partial control but you might not have the option to use a different broad stock so you'd need to fundamentally alter your investment strategy unlike with an IRA.

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iceport
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Re: Tax Loss Harvesting Worth it?

Post by iceport » Fri Aug 09, 2019 1:13 pm

^^^ Huh :?: :?: :?:

The wash sale period is only 61 days...

The whole line of reasoning is bogus.
"Discipline matters more than allocation.” ─William Bernstein

rkhusky
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Re: Tax Loss Harvesting Worth it?

Post by rkhusky » Fri Aug 09, 2019 1:15 pm

placeholder wrote:
Fri Aug 09, 2019 12:46 pm
fortyofforty wrote:
Fri Aug 09, 2019 6:00 am
If I can tell my employer to move money at least between a stock fund and a bond fund, along with ongoing investments into those funds, then I'd say I had control over the investments therein. But that's just how I see it.
At best partial control but you might not have the option to use a different broad stock so you'd need to fundamentally alter your investment strategy unlike with an IRA.
If all the stars lined against you and your employer plan has only one stock fund, which happened to be the same one as in your taxable account, which happened to have large gains such that you wouldn’t want to switch to something else, which then happened to have large losses that you want to realize for TLH, you could just turn off purchases in the stock fund in your 401k for 30 days. And if you already had purchased shares within the last 30 days, wait to TLH. If you can’t wait, the bi-weekly or monthly purchase is likely to result in only a small disallowance due to the wash sale.

None of this requires a fundamental change in your investment strategy. A minor inconvenience at worst.

placeholder
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Re: Tax Loss Harvesting Worth it?

Post by placeholder » Fri Aug 09, 2019 2:25 pm

rkhusky wrote:
Fri Aug 09, 2019 1:15 pm

If all the stars lined against you and your employer plan has only one stock fund, which happened to be the same one as in your taxable account, which happened to have large gains such that you wouldn’t want to switch to something else, which then happened to have large losses that you want to realize for TLH, you could just turn off purchases in the stock fund in your 401k for 30 days. And if you already had purchased shares within the last 30 days, wait to TLH. If you can’t wait, the bi-weekly or monthly purchase is likely to result in only a small disallowance due to the wash sale.
None of what you say is particularly relevant as the key factor is that the 401k is a trust (and so not directly owned by the taxpayer) and does not have the level of control mentioned in the court case so 401ks are not accounts of the taxpayer as is required to participate in wash sales.

rkhusky
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Re: Tax Loss Harvesting Worth it?

Post by rkhusky » Fri Aug 09, 2019 3:47 pm

placeholder wrote:
Fri Aug 09, 2019 2:25 pm
rkhusky wrote:
Fri Aug 09, 2019 1:15 pm

If all the stars lined against you and your employer plan has only one stock fund, which happened to be the same one as in your taxable account, which happened to have large gains such that you wouldn’t want to switch to something else, which then happened to have large losses that you want to realize for TLH, you could just turn off purchases in the stock fund in your 401k for 30 days. And if you already had purchased shares within the last 30 days, wait to TLH. If you can’t wait, the bi-weekly or monthly purchase is likely to result in only a small disallowance due to the wash sale.
None of what you say is particularly relevant as the key factor is that the 401k is a trust (and so not directly owned by the taxpayer) and does not have the level of control mentioned in the court case so 401ks are not accounts of the taxpayer as is required to participate in wash sales.
The primary IRS ruling on trusts, on which the 2008 ruling on IRA's is based, uses the language "actual command over the property". You have "actual command" over your 401k. The 2008 ruling uses the language "absolute dominion and control". In neither case does the IRS specify a level of "command" or "control".

You actually do not have absolute power over buying and selling in your IRA or taxable account. Vanguard, for example, imposes trading restrictions. They also reserve the right to deny redemption if it would be disruptive. They can also change the asset allocation and cost of their funds, or close funds. So, I think the phrase "absolute dominion" might be a bit strong.

How much command and control do you have over your spouse's IRA? Or corporations that you control? Or taxable trusts that you control?

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Re: Tax Loss Harvesting Worth it?

Post by H-Town » Fri Aug 09, 2019 3:55 pm

placeholder wrote:
Fri Aug 09, 2019 2:25 pm
rkhusky wrote:
Fri Aug 09, 2019 1:15 pm

If all the stars lined against you and your employer plan has only one stock fund, which happened to be the same one as in your taxable account, which happened to have large gains such that you wouldn’t want to switch to something else, which then happened to have large losses that you want to realize for TLH, you could just turn off purchases in the stock fund in your 401k for 30 days. And if you already had purchased shares within the last 30 days, wait to TLH. If you can’t wait, the bi-weekly or monthly purchase is likely to result in only a small disallowance due to the wash sale.
None of what you say is particularly relevant as the key factor is that the 401k is a trust (and so not directly owned by the taxpayer) and does not have the level of control mentioned in the court case so 401ks are not accounts of the taxpayer as is required to participate in wash sales.
I think you should be more concern about your 401k plan than the grey area with TLH. I can do pretty much anything with my 401k.

Just want to add that we all need to follow Internal Revenue Code. But I would say that many people will have wash sale by accident in connection with their IRA and 401k without realizing it. The wash sale rule is very simple but the enforcement and compliance are nightmare.

iceport said it best:
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.)

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kenyan
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Re: Tax Loss Harvesting Worth it?

Post by kenyan » Fri Aug 09, 2019 4:15 pm

Certainly seems worth it to me, now that I have (risky) taxable investments. Especially since my marginal income tax rate is over 33% (with state taxes), and my current planning has me paying 0% LTCG rate (including state taxes) when I withdraw, that's a pretty nice savings on $3k per year.
Retirement investing is a marathon.

placeholder
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Re: Tax Loss Harvesting Worth it?

Post by placeholder » Fri Aug 09, 2019 4:22 pm

rkhusky wrote:
Fri Aug 09, 2019 3:47 pm
The primary IRS ruling on trusts, on which the 2008 ruling on IRA's is based, uses the language "actual command over the property". You have "actual command" over your 401k. The 2008 ruling uses the language "absolute dominion and control". In neither case does the IRS specify a level of "command" or "control".
You can feel in your heart that the sorts of restrictions inherent to 401ks are actual command but I don't think so and I don't think the IRS does either which is the most important factor.

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Re: Tax Loss Harvesting Worth it?

Post by placeholder » Fri Aug 09, 2019 4:24 pm

H-Town wrote:
Fri Aug 09, 2019 3:55 pm

I think you should be more concern about your 401k plan than the grey area with TLH. I can do pretty much anything with my 401k.
Why concerned when the IRS has never made the slightest indication that these accounts are included and you are (based on history) more likely to be hit by a meteor than have a wash sale in a 401k so ARE you worried about meteors?

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Re: Tax Loss Harvesting Worth it?

Post by H-Town » Fri Aug 09, 2019 4:45 pm

placeholder wrote:
Fri Aug 09, 2019 4:24 pm
H-Town wrote:
Fri Aug 09, 2019 3:55 pm

I think you should be more concern about your 401k plan than the grey area with TLH. I can do pretty much anything with my 401k.
Why concerned when the IRS has never made the slightest indication that these accounts are included and you are (based on history) more likely to be hit by a meteor than have a wash sale in a 401k so ARE you worried about meteors?
I'm not concerned. I just follow my understanding of the IRC on the wash sale rule. I hate to create wash sale and keep track of the basis years after years.

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Re: Tax Loss Harvesting Worth it?

Post by placeholder » Fri Aug 09, 2019 4:49 pm

H-Town wrote:
Fri Aug 09, 2019 4:45 pm
I'm not concerned. I just follow my understanding of the IRC on the wash sale rule. I hate to create wash sale and keep track of the basis years after years.
That wouldn't be a concern for 401ks because if there were wash sales then there would be no basis adjustment and in taxable you have to track basis anyway.

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Re: Tax Loss Harvesting Worth it?

Post by rkhusky » Fri Aug 09, 2019 6:05 pm

placeholder wrote:
Fri Aug 09, 2019 4:24 pm
H-Town wrote:
Fri Aug 09, 2019 3:55 pm

I think you should be more concern about your 401k plan than the grey area with TLH. I can do pretty much anything with my 401k.
Why concerned when the IRS has never made the slightest indication that these accounts are included and you are (based on history) more likely to be hit by a meteor than have a wash sale in a 401k so ARE you worried about meteors?
The IRS has not given the slightest indication that 401k’s or any other type of account is exempted from wash sale rules, since they have never exempted any type of account. On the other hand, they have explicitly included many types of accounts, including trusts.

Therefore, to argue that any type of account is exempt, one must make up criteria, since the IRS has not provided any hint as to what criteria would be applicable for such an exemption.

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Re: Tax Loss Harvesting Worth it?

Post by placeholder » Fri Aug 09, 2019 6:37 pm

rkhusky wrote:
Fri Aug 09, 2019 6:05 pm
The IRS has not given the slightest indication that 401k’s or any other type of account is exempted from wash sale rules, since they have never exempted any type of account. On the other hand, they have explicitly included many types of accounts, including trusts.
They have not at any time included all trusts just one particular court case and then derivative from that for IRAs but the IRS is well aware that 401ks are among the most common tax advantaged accounts so the idea that they would ignore them and only address IRAs if they were meant to be included is not credible.

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Re: Tax Loss Harvesting Worth it?

Post by rkhusky » Fri Aug 09, 2019 6:58 pm

placeholder wrote:
Fri Aug 09, 2019 6:37 pm
rkhusky wrote:
Fri Aug 09, 2019 6:05 pm
The IRS has not given the slightest indication that 401k’s or any other type of account is exempted from wash sale rules, since they have never exempted any type of account. On the other hand, they have explicitly included many types of accounts, including trusts.
They have not at any time included all trusts just one particular court case and then derivative from that for IRAs but the IRS is well aware that 401ks are among the most common tax advantaged accounts so the idea that they would ignore them and only address IRAs if they were meant to be included is not credible.
That's just wishful thinking. Lack of specific addressing does not equal consent, especially when there are already two relevant rulings.

But I do imagine that the IRS has bigger fish to fry. If one considers the number of people who can max out a 401k and an IRA and then have enough to contribute to a taxable account, and then multiply that by the fraction of those with such horrible 401k's that they can't easily avoid significant wash sales, I wonder if you'd end up with 100 people.

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Re: Tax Loss Harvesting Worth it?

Post by placeholder » Fri Aug 09, 2019 8:03 pm

rkhusky wrote:
Fri Aug 09, 2019 6:58 pm
That's just wishful thinking. Lack of specific addressing does not equal consent, especially when there are already two relevant rulings.
No but it certainly doesn't imply the opposite because the IRS publications and instructions are designed to cover the essentials of what taxpayers and preparers need to properly fill out their taxes so the idea that they would cover one type of retirement account and not the nearly if not more common 401k is not credible.

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Re: Tax Loss Harvesting Worth it?

Post by rkhusky » Fri Aug 09, 2019 9:46 pm

placeholder wrote:
Fri Aug 09, 2019 8:03 pm
rkhusky wrote:
Fri Aug 09, 2019 6:58 pm
That's just wishful thinking. Lack of specific addressing does not equal consent, especially when there are already two relevant rulings.
No but it certainly doesn't imply the opposite because the IRS publications and instructions are designed to cover the essentials of what taxpayers and preparers need to properly fill out their taxes so the idea that they would cover one type of retirement account and not the nearly if not more common 401k is not credible.
The Supreme Court ruled in 1938 in White v United States that deductions can only be taken if there is a clear provision in applicable statutes that the deduction is allowable. Absence of specific ruling by the IRS and conjecture does not equal clear provision in the law.

One should not therefore take a deduction for a loss in a taxable account, where replacement shares of substantially identical investments are purchased in a 401k, until the IRA specifically exempts 401k's from the wash sale rules.

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Re: Tax Loss Harvesting Worth it?

Post by placeholder » Fri Aug 09, 2019 11:41 pm

rkhusky wrote:
Fri Aug 09, 2019 9:46 pm
The Supreme Court ruled in 1938 in White v United States that deductions can only be taken if there is a clear provision in applicable statutes that the deduction is allowable. Absence of specific ruling by the IRS and conjecture does not equal clear provision in the law.
There is clear statute allow capital losses so this is irrelevant.

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Re: Tax Loss Harvesting Worth it?

Post by Lee_WSP » Sat Aug 10, 2019 1:17 am

It is clear from this discussion that the safest course of action is to call it a wash sale if you bought the same asset in your 401k. However, it is highly unlikely to be brought to the attention of the IRS and if you did, it is not 100% clear that it is considered a wash sale, but the odds are not in your favor if challenged.

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Re: Tax Loss Harvesting Worth it?

Post by placeholder » Sat Aug 10, 2019 1:30 am

Lee_WSP wrote:
Sat Aug 10, 2019 1:17 am
It is clear from this discussion that the safest course of action is to call it a wash sale if you bought the same asset in your 401k. However, it is highly unlikely to be brought to the attention of the IRS and if you did, it is not 100% clear that it is considered a wash sale, but the odds are not in your favor if challenged.
The safest thing to do would to always keep it in the same account and only hold it in cash or bonds but so what?

How many people follow extreme measures for something that is of low impact and has literally to the best of anyone knowledge ever happened anywhere I mean do you avoid driving on the highways because flying debris might come in your windshield which is something that really does happen every year?

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Re: Tax Loss Harvesting Worth it?

Post by rkhusky » Sat Aug 10, 2019 6:43 am

placeholder wrote:
Sat Aug 10, 2019 1:30 am
I mean do you avoid driving on the highways because flying debris might come in your windshield which is something that really does happen every year?
Just because it is unlikely to be issued a ticket for going 56 mph in a 55 mph zone, does not mean that it is legal to drive 56 mph in a 55 mph zone.

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Re: Tax Loss Harvesting Worth it?

Post by rkhusky » Sat Aug 10, 2019 6:45 am

placeholder wrote:
Fri Aug 09, 2019 11:41 pm
rkhusky wrote:
Fri Aug 09, 2019 9:46 pm
The Supreme Court ruled in 1938 in White v United States that deductions can only be taken if there is a clear provision in applicable statutes that the deduction is allowable. Absence of specific ruling by the IRS and conjecture does not equal clear provision in the law.
There is clear statute allow capital losses so this is irrelevant.
You are allowed to declare capital losses, unless you acquire substantially identical replacements within the wash sale window. Neither Congress nor the IRS has exempted any type of account from the latter requirement.

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Re: Tax Loss Harvesting Worth it?

Post by LadyGeek » Sat Aug 10, 2019 8:42 am

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