Do most Bogleheads TLH?

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SpiritDitch
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Do most Bogleheads TLH?

Post by SpiritDitch » Wed Apr 15, 2020 1:20 pm

Last time there was a significant drawdown, I looked into TLH but was unsure: I was (and still am) mostly in auto-rebalancing funds, and the upside seemed marginal compared to the added complexity. By the time I had gathered enough information, the opportunity had disappeared.

This time it looks like the opportunity might last a bit longer.
I'm wondering if most people who consider themselves passive investors here do TLH.
How do you estimate the benefits, and how do you make it dead-simple (if possible) so it becomes part of staying the course?

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David Jay
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Re: Do most Bogleheads TLH?

Post by David Jay » Wed Apr 15, 2020 1:24 pm

Have you read the Wiki page? Link: https://www.bogleheads.org/wiki/Tax_loss_harvesting
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iceport
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Re: Do most Bogleheads TLH?

Post by iceport » Wed Apr 15, 2020 2:14 pm

SpiritDitch wrote:
Wed Apr 15, 2020 1:20 pm
I'm wondering if most people who consider themselves passive investors here do TLH.
How do you estimate the benefits, and how do you make it dead-simple (if possible) so it becomes part of staying the course?
I am firmly within the passive investor camp, and I try to manage my portfolio as passively as possible. Yet I definitely take advantage of significant TLH opportunities when they arise. (I don't seek to harvest every $100 that comes along.)

When I TLH, I use a substitute fund that is practically identical, but not substantially identical. And I use only mutual funds in the taxable account. So I am able to exchange instantaneously between the losing fund and the substitute fund without spending a second out of the market. That counts as staying the course in my book.

Clearly, this violates the spirit of the wash sale rule, but it's widely assumed not to violate the letter of the law. So I take advantage of the ginormous loophole and book the loss.

For a quick and dirty estimate of the value, I figure I'm at least gaining the difference between my income tax rate and my capital gains tax rate, because I plan to apply the losses against ordinary income, $3000 at a time.
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firebirdparts
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Re: Do most Bogleheads TLH?

Post by firebirdparts » Wed Apr 15, 2020 3:41 pm

I am more in the tax-shelter-everything camp. You have to eliminate all the people from consideration who have all their money in a 401k. That is assuming the original question is the question you meant to ask.
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Re: Do most Bogleheads TLH?

Post by arsenalfan » Wed Apr 15, 2020 3:55 pm

Assuming you've filled up all the other "buckets" in order and find yourself with an aftertax investing account, TLH in aftertax is rational.

I never appreciated TLH until this year (not having had a huge opportunity to TLH in the bull market).

At end of Jan 2020 I sold a bunch of US stocks. This was dumb luck: we have 3 old cars to replace in the next 2 years, and I was going to payoff a rental property. Cap gains was around $40,000, mostly long-term, so about $8000.

Then Covid crash happened. I TLH and sold some international, generating $43,000 in losses.

This reduced my $8000 2021 tax bill to $0, with $3000 additional losses to count against non-investment income.

PS we're going to stretch our 3 old cars a few years longer, and I plowed most of the Jan money back into equitities in March. Still sitting on the interntaional TLH proceeds, as I'm re-evaluating my international AA.

PPS here's a question: If I TLH $43,000 in losses, can I carry that forward and, say, offset $43,000 in cap gains in 2024?
Last edited by arsenalfan on Wed Apr 15, 2020 4:31 pm, edited 2 times in total.

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FIREchief
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Re: Do most Bogleheads TLH?

Post by FIREchief » Wed Apr 15, 2020 4:07 pm

SpiritDitch wrote:
Wed Apr 15, 2020 1:20 pm
I'm wondering if most people who consider themselves passive investors here do TLH.
TLH has nothing to do with active vs. passive.
How do you estimate the benefits, and how do you make it dead-simple (if possible) so it becomes part of staying the course?
Estimating the benefits can be very simple, especially if there is some certainty that TLH will allow offset of up to $3K of ordinary income. There are even more benefits if a person is currently paying taxes on LTCG but is planning to drop into the zero percent LTCG income level in the near future. This is just part of effective long term tax planning.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Do most Bogleheads TLH?

Post by iamlucky13 » Wed Apr 15, 2020 4:13 pm

No, I have not done TLH before.

I was unaware until a couple weeks ago that there is a big loophole in the wash sale rule, so I considered it more or less off the table for me.

I'm really busy with work right now, but as time allows I intend to learn more about it and figure out how much of my holdings are currently underwater compared to their cost basis.

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GerryL
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Re: Do most Bogleheads TLH?

Post by GerryL » Wed Apr 15, 2020 4:54 pm

I do not proactively TLH, but I have taken advantage of the tax write-off on a few occasions. For example, deciding to dispose of some small lots of stocks that I inherited shortly before 2008 (one went from a basis of over $50/sh to around $2), and when consolidating my portfolio and deciding to get out of a fund that did not make the cut for my shorter list of funds -- I just bit the bullet and did the exchange at a loss.

I still have a stash of my former employer's stock that is very gradually going to into my DAF. If the day should come when Megacorp crashes in some dramatic way, I may be in a position to TLH, but I'm not wishing for that.

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Re: Do most Bogleheads TLH?

Post by Chris K Jones » Wed Apr 15, 2020 4:59 pm

I am a passive investor and I taxloss harvest. I only use mutual funds. Vanguard has a number of excellent pairs. For me, it is definitely worthwhile. I first generated significant losses during the 2008-2009 financial crisis. Those were about to run out and now Corona virus has given me another five years or so of usable losses.

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Re: Do most Bogleheads TLH?

Post by Chris K Jones » Wed Apr 15, 2020 5:04 pm

arsenalfan wrote:
Wed Apr 15, 2020 3:55 pm

PPS here's a question: If I TLH $43,000 in losses, can I carry that forward and, say, offset $43,000 in cap gains in 2024?
No, but you can carry most of it forward to 2024. Each year until 2024, 3000 of it will be used to reduce ordinary income. That is even better than long term capital gains reduction. So in 2024, assuming you have no other gains, 31000 will be carried forward. Hope this helps.

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Re: Do most Bogleheads TLH?

Post by arsenalfan » Wed Apr 15, 2020 9:05 pm

Chris K Jones wrote:
Wed Apr 15, 2020 5:04 pm
arsenalfan wrote:
Wed Apr 15, 2020 3:55 pm

PPS here's a question: If I TLH $43,000 in losses, can I carry that forward and, say, offset $43,000 in cap gains in 2024?
No, but you can carry most of it forward to 2024. Each year until 2024, 3000 of it will be used to reduce ordinary income. That is even better than long term capital gains reduction. So in 2024, assuming you have no other gains, 31000 will be carried forward. Hope this helps.
Thank you

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JonnyDVM
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Re: Do most Bogleheads TLH?

Post by JonnyDVM » Wed Apr 15, 2020 9:39 pm

If you aren’t tax loss harvesting you're not doing it right.
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celia
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Re: Do most Bogleheads TLH?

Post by celia » Wed Apr 15, 2020 9:44 pm

To TLH, you have to own something that is now worth less than when you bought it. If you’ve been a long term buy-and-hold investor, you may not own anything that is eligible.

So, not all Bogleheads Tax Loss Harvest. I have no idea about “most” Bogleheads!

atdharris
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Re: Do most Bogleheads TLH?

Post by atdharris » Wed Apr 15, 2020 9:52 pm

I TLH'd through market and I did the same at the end of December 2018. It's worth doing

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Re: Do most Bogleheads TLH?

Post by pascalwager » Wed Apr 15, 2020 10:34 pm

Never done it myself and neither did my former investment company.
Retired, pension, no SS | Bond funds: TIPS, TBM | Global stocks: total market, large value, small company, emerging market funds

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Mlm
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Re: Do most Bogleheads TLH?

Post by Mlm » Wed Apr 15, 2020 10:43 pm

I did a TLH for the first time this year. I had a small mutual fund investment from back in 2013 that I have been wanting to get rid of. ACA income restrictions had previously prevented me from selling but this year when there was a big drop and I was on Medicare I was actually able to get out of it and take a tax loss. I wasn’t all that thrilled with having this opportunity but I do see tax gain harvesting in my future before I start collecting Social Security

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AspireToRetire
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Re: Do most Bogleheads TLH?

Post by AspireToRetire » Wed Apr 15, 2020 11:12 pm

The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?

That’s my struggle.

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FIREchief
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Re: Do most Bogleheads TLH?

Post by FIREchief » Wed Apr 15, 2020 11:15 pm

JonnyDVM wrote:
Wed Apr 15, 2020 9:39 pm
If you aren’t tax loss harvesting you're not doing it right.
Bingo!! Best post in the thread! :sharebeer
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Re: Do most Bogleheads TLH?

Post by TierArtz » Thu Apr 16, 2020 12:18 am

I'm one more who does. First time was 2018. This year, I harvested about $35K in capital losses; if my timing was better, it could have been 2-3X that. This year, my TLH was part "classical" and part shifting to re-balance and/or relocate investments. Shifts were:

Some Total stock market to All-World exUS.
Total International Stock Market to All-World exUS.
All of All-World exUS back to Total International Stock Market.
Most of Intermediate Term Tax-Exempt Municipal Bond to Total International Stock Market
Some Total stock market to S&P 500 (will be "stuck" with that, unless things get uglier again).
Losses were excuse to get rid of Tax-Managed Small Cap to Total International Stock Market.

Above "tax free" taxable brokerage shifts allowed me to go to 100% bonds in 401(k) and NQ-DCP, and to decrease Total international in a Roth IRA.

I hope the TLH Rodeo is over for awhile.

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Re: Do most Bogleheads TLH?

Post by ChiKid24 » Thu Apr 16, 2020 12:35 am

AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?

That’s my struggle.
While lower cost basis is true, you also now have a tax loss you can apply to a taxable gain immediately or use $3k a year to offset ordinary income over time. You can even use it to increase your basis in other securities. Example: You tax loss harvest $10k in a total market etf moving from ITOT to SCHB. You also hold Apple stock which had appreciated $10k. You can sell Apple, use the tax loss you harvested from ITOT to offset the gain from Apple and pay no taxes. Additionally, you can immediately rebuy Apple stock with the sale proceeds and increase your basis by the $10k. Remember wash sale rules only apply to tax losses and not tax gains.

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Re: Do most Bogleheads TLH?

Post by heyyou » Thu Apr 16, 2020 1:13 am

I don't bother with TLH-ing, perhaps I should, but that would involve paying attention to stock market levels, not just the daily up or down fluctuations that are reported as news.
Are Roth conversions the tax sheltered equivalent of TLH? I've done them annually in retirement, prior to starting SS at age 70.

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Re: Do most Bogleheads TLH?

Post by Kobinator » Thu Apr 16, 2020 1:28 am

arsenalfan wrote:
Wed Apr 15, 2020 9:05 pm
Chris K Jones wrote:
Wed Apr 15, 2020 5:04 pm
arsenalfan wrote:
Wed Apr 15, 2020 3:55 pm

PPS here's a question: If I TLH $43,000 in losses, can I carry that forward and, say, offset $43,000 in cap gains in 2024?
No, but you can carry most of it forward to 2024. Each year until 2024, 3000 of it will be used to reduce ordinary income. That is even better than long term capital gains reduction. So in 2024, assuming you have no other gains, 31000 will be carried forward. Hope this helps.
Thank you
Really, you have to use losses to offset ordinary income? I know it's a no-brainer, so that's what people do if they can, but I did not think it was mandatory.

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Re: Do most Bogleheads TLH?

Post by firebirdparts » Thu Apr 16, 2020 8:15 am

Kobinator wrote:
Thu Apr 16, 2020 1:28 am
Really, you have to use losses to offset ordinary income? I know it's a no-brainer, so that's what people do if they can, but I did not think it was mandatory.
Thread hijack of the year.
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dwickenh
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Re: Do most Bogleheads TLH?

Post by dwickenh » Thu Apr 16, 2020 9:11 am

I TLH thanks to livesoft's explanations and it makes perfect sense to me.
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Re: Do most Bogleheads TLH?

Post by grabiner » Thu Apr 16, 2020 9:42 am

AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?
There are still several ways to gain, even if capital-gains tax rates go up in the future.

Your harvested loss offsets ordinary income, which is taxed at a higher rate than capital gains, so you come out ahead even if capital-gains taxes go up.

You get a tax savings now and pay a tax bill later, so you have an opportunity to invest your tax savings. If you harvest a $10,000 loss and save $2400 in taxes in the next few years, and capital-gains rates go up to 30%, you still come out ahead if the $2400 investment grows to $3000 by the time you sell many years in the future.

You might never sell the replacement stock; you might leave it to your heirs or donate it to charity.

You might sell the replacement stock after you retire, when you have low income and are thus in a low tax bracket for capital gains.
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AspireToRetire
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Re: Do most Bogleheads TLH?

Post by AspireToRetire » Thu Apr 16, 2020 10:37 am

ChiKid24 wrote:
Thu Apr 16, 2020 12:35 am
AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?

That’s my struggle.
While lower cost basis is true, you also now have a tax loss you can apply to a taxable gain immediately or use $3k a year to offset ordinary income over time. You can even use it to increase your basis in other securities. Example: You tax loss harvest $10k in a total market etf moving from ITOT to SCHB. You also hold Apple stock which had appreciated $10k. You can sell Apple, use the tax loss you harvested from ITOT to offset the gain from Apple and pay no taxes. Additionally, you can immediately rebuy Apple stock with the sale proceeds and increase your basis by the $10k. Remember wash sale rules only apply to tax losses and not tax gains.
I understand the sentiment.

But your example above is case in point.

If I sell the Apple stock to force a capital gain, and then rebuy it then I’ve increased the cost basis.

And for the total market ETF I will force a capital loss and then have a lower cost basis.

So the net difference here is already zero.

Sure I can offset the loss against ordinary income now, but I also have to pay the piper in the future using a lower cost basis and at possibly a higher capital gains rate.

So that ends up being a wash (pun unintended?)

Add to that the hassle of additional paper work during tax season, record keeping, any transaction fees, time spent planning the harvesting, etc and it becomes even less worth it.

Of course all is dependent on personal tax bracket, how far one is from their intended IPS, future tax rates, etc. But overall I tend to think the benefits of TLH are overstated

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AspireToRetire
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Re: Do most Bogleheads TLH?

Post by AspireToRetire » Thu Apr 16, 2020 10:49 am

grabiner wrote:
Thu Apr 16, 2020 9:42 am
AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?
There are still several ways to gain, even if capital-gains tax rates go up in the future.

Your harvested loss offsets ordinary income, which is taxed at a higher rate than capital gains, so you come out ahead even if capital-gains taxes go up.

You get a tax savings now and pay a tax bill later, so you have an opportunity to invest your tax savings. If you harvest a $10,000 loss and save $2400 in taxes in the next few years, and capital-gains rates go up to 30%, you still come out ahead if the $2400 investment grows to $3000 by the time you sell many years in the future.

You might never sell the replacement stock; you might leave it to your heirs or donate it to charity.

You might sell the replacement stock after you retire, when you have low income and are thus in a low tax bracket for capital gains.
That is not necessarily true. You are omitting the fact that you now have a lower cost basis with the rest of that investment.

If you harvest a $10,000 loss and save $2,400 in taxes as you said, sure you can reinvest the $2,400 and grow it to $3000.

But you now have a lower tax basis for the rest of your investment. And you haven’t accounted for whether that increase in your larger future capital gains bill will offset the growth in your smaller $2,400 investment.

You mentioned that if capital gains increase to 30% in the future you would come out ahead. Actually that is not correct for 99% of Americans who have income tax rates below that right now.

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Re: Do most Bogleheads TLH?

Post by Flashes1 » Thu Apr 16, 2020 11:26 am

It's not worth the hassle to me. I'm in the accumulation stage with automatic monthly investments in TSM over the past 8 years - so I shudder to think of the tax mess it would create.

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Re: Do most Bogleheads TLH?

Post by grabiner » Thu Apr 16, 2020 12:20 pm

AspireToRetire wrote:
Thu Apr 16, 2020 10:49 am
grabiner wrote:
Thu Apr 16, 2020 9:42 am
AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?
ou get a tax savings now and pay a tax bill later, so you have an opportunity to invest your tax savings. If you harvest a $10,000 loss and save $2400 in taxes in the next few years, and capital-gains rates go up to 30%, you still come out ahead if the $2400 investment grows to $3000 by the time you sell many years in the future.[/b]
That is not necessarily true. You are omitting the fact that you now have a lower cost basis with the rest of that investment.

If you harvest a $10,000 loss and save $2,400 in taxes as you said, sure you can reinvest the $2,400 and grow it to $3000.

But you now have a lower tax basis for the rest of your investment. And you haven’t accounted for whether that increase in your larger future capital gains bill will offset the growth in your smaller $2,400 investment.
If you harvested a $10,000 loss, you decreased your cost basis by $10,000. Thus, when you sell, your capital gain will be $10,000 higher than if you had not harvested the loss; if your tax rate on capital gains increases from the current 15% to 30%, your tax bill will be increased by $3000.

So, even in this scenario, you come out ahead if you can invest $2400 and earn a total of more than 25%. That is likely because you would only be keeping the money in stock if you intend to hold it for the long term. If the "long term" is ten years, a ten-year return of 2.25% compounds to 25%.
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Re: Do most Bogleheads TLH?

Post by Bluce » Thu Apr 16, 2020 12:39 pm

SpiritDitch wrote:
Wed Apr 15, 2020 1:20 pm
Last time there was a significant drawdown, I looked into TLH but was unsure: I was (and still am) mostly in auto-rebalancing funds, and the upside seemed marginal compared to the added complexity. By the time I had gathered enough information, the opportunity had disappeared.

This time it looks like the opportunity might last a bit longer.
I'm wondering if most people who consider themselves passive investors here do TLH.
How do you estimate the benefits, and how do you make it dead-simple (if possible) so it becomes part of staying the course?
Never done it here, and I've never delved into it enough to really understand the ins and outs.

Only about 20% of my portfolio is taxable, the rest is in a SEP-IRA.
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Re: Do most Bogleheads TLH?

Post by AspireToRetire » Thu Apr 16, 2020 1:05 pm

grabiner wrote:
Thu Apr 16, 2020 12:20 pm
AspireToRetire wrote:
Thu Apr 16, 2020 10:49 am
grabiner wrote:
Thu Apr 16, 2020 9:42 am
AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?
ou get a tax savings now and pay a tax bill later, so you have an opportunity to invest your tax savings. If you harvest a $10,000 loss and save $2400 in taxes in the next few years, and capital-gains rates go up to 30%, you still come out ahead if the $2400 investment grows to $3000 by the time you sell many years in the future.[/b]
That is not necessarily true. You are omitting the fact that you now have a lower cost basis with the rest of that investment.

If you harvest a $10,000 loss and save $2,400 in taxes as you said, sure you can reinvest the $2,400 and grow it to $3000.

But you now have a lower tax basis for the rest of your investment. And you haven’t accounted for whether that increase in your larger future capital gains bill will offset the growth in your smaller $2,400 investment.
If you harvested a $10,000 loss, you decreased your cost basis by $10,000. Thus, when you sell, your capital gain will be $10,000 higher than if you had not harvested the loss; if your tax rate on capital gains increases from the current 15% to 30%, your tax bill will be increased by $3000.

So, even in this scenario, you come out ahead if you can invest $2400 and earn a total of more than 25%. That is likely because you would only be keeping the money in stock if you intend to hold it for the long term. If the "long term" is ten years, a ten-year return of 2.25% compounds to 25%.
No. If you want to consider the 25% compounding for your harvested loss then you also have to consider it for the rest of your investment. You can’t conveniently assume the $2400 will grow but the rest of your investment won’t.

To illustrate your own example further let’s walk through this below:

Let’s say Jack and Jill each have $100K and the cost of a fund is $1 per share. So they each buy 100K shares on the same day. A year later their funds have now declined to a $90K value.

Jack sells his entire position to tax loss harvest $10K. But you are right that he also has a tax savings of $2400 that he reinvests immediately. So now he has a new cost basis of $92,400 which buys him 102,667 shares ($92,400/$0.9 which is now the devalued cost per share).

Jill on the other hand does nothing. So now she just has her same 100K shares.

In ten years, we assume there is a 25% growth for both when comparing to the initial start date (exactly as you said above). So now value of shares becomes $1.25. And capital gains rate is 30% as you said above as well.

Jack’s assets are now worth $128,333 ($1.25 x 102,667 shares). And he bought them at a lower cost basis of $92,400. So his capital gain is $35,933. Tax 30% of that and his capital gains tax is $11,978.

That means his total remaining assets are $128,333 - $11,978 = $116,355.

So Jack’s total assets after TLH, reinvesting the harvested loss, waiting for ten years of growth, and paying capital gains tax is $116,355.

As for Jill, she did nothing. So she now sells her appreciated 100k shares at a price of $125,000. She has $25,000 in capital gains taxed at 30% which equals $7,500. So her total assets are $125,000 - $7,500 which equals $117,500.

So Jill’s total assets after doing nothing, playing golf instead, and staying invested for the same ten years was higher than Jack. Not to mention less hassle and less paper work.
Last edited by AspireToRetire on Thu Apr 16, 2020 2:34 pm, edited 1 time in total.

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Re: Do most Bogleheads TLH?

Post by grabiner » Thu Apr 16, 2020 1:11 pm

AspireToRetire wrote:
Thu Apr 16, 2020 1:05 pm
grabiner wrote:
Thu Apr 16, 2020 12:20 pm
AspireToRetire wrote:
Thu Apr 16, 2020 10:49 am
grabiner wrote:
Thu Apr 16, 2020 9:42 am
AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?
ou get a tax savings now and pay a tax bill later, so you have an opportunity to invest your tax savings. If you harvest a $10,000 loss and save $2400 in taxes in the next few years, and capital-gains rates go up to 30%, you still come out ahead if the $2400 investment grows to $3000 by the time you sell many years in the future.[/b]
That is not necessarily true. You are omitting the fact that you now have a lower cost basis with the rest of that investment.

If you harvest a $10,000 loss and save $2,400 in taxes as you said, sure you can reinvest the $2,400 and grow it to $3000.

But you now have a lower tax basis for the rest of your investment. And you haven’t accounted for whether that increase in your larger future capital gains bill will offset the growth in your smaller $2,400 investment.
If you harvested a $10,000 loss, you decreased your cost basis by $10,000. Thus, when you sell, your capital gain will be $10,000 higher than if you had not harvested the loss; if your tax rate on capital gains increases from the current 15% to 30%, your tax bill will be increased by $3000.

So, even in this scenario, you come out ahead if you can invest $2400 and earn a total of more than 25%. That is likely because you would only be keeping the money in stock if you intend to hold it for the long term. If the "long term" is ten years, a ten-year return of 2.25% compounds to 25%.
No. If you want to consider the 25% compounding for your harvested loss then you also have to consider it for the rest of your investment. You can’t conveniently assume the $2400 will grow but the rest of your investment won’t.

To illustrate your own example further let’s walk through this below:

Let’s say Jack and Jill each have $100K and the cost of a fund is $1 per share. So they each buy 100K shares on the same day. A year later their funds have now declined to a $90K value.

Jack tax loss harvests $10K. That means he has to sell 11,111 shares ($10,000/$0.9 which is current cost of the devalued share). So now he has 88,889 shares remaining (100,000 - 11,111). But you are right that he also has a tax savings of $2400 that he reinvests immediately. So that’s an additional 2,666 shares ($2400/0.9). So now jack has a total of 91,555 shares after reinvesting his harvested loss.
The math is wrong here. To harvest the $10K loss, he has to sell all 100,000 of his shares, and then buy 90,000 new shares of something equivalent. Thus his basis will be $92,400.

The one adjustment needed to my argument is that the 25% return on the $2400 must also be an after-tax return. If Jack's $2400 grows to $3000 and he pays tax on the $600 gain, he does not have $300. However, a long-term return on stocks is likely to be significantly higher than this; in ten years, 25% is about the return Jack would expect on a municipal-bond fund, which has no tax due on the gain.
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Re: Do most Bogleheads TLH?

Post by AspireToRetire » Thu Apr 16, 2020 2:43 pm

The math is wrong here. To harvest the $10K loss, he has to sell all 100,000 of his shares, and then buy 90,000 new shares of something equivalent. Thus his basis will be $92,400.

The one adjustment needed to my argument is that the 25% return on the $2400 must also be an after-tax return. If Jack's $2400 grows to $3000 and he pays tax on the $600 gain, he does not have $300. However, a long-term return on stocks is likely to be significantly higher than this; in ten years, 25% is about the return Jack would expect on a municipal-bond fund, which has no tax due on the gain.”


Ahh yes! You are absolutely correct here. Forgive my error. I went back and edited the post above to correct that.

As you will see, though, even with that correction the numbers still show that sitting tight comes out ahead over TLH in that tax scenario.

If I made any other errors please let me know.

Cheers!
:beer

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Re: Do most Bogleheads TLH?

Post by FIREchief » Thu Apr 16, 2020 3:15 pm

AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?

That’s my struggle.
Tax rate changes sometimes happen quickly, but never over night. Let's say that I TLH this year to capture $30K in losses and use $20K to offset gains or ordinary income over the next five years. In year six, Washington passes a LTCG tax increase to take effect Jan 1, of year seven. I just need to sell off enough assets in December of year six to generate $10K in gains and I'll "use up" my remaining losses before the higher tax rates take effect. I can sell them and rebuy immediately if I still want that fund in my portfolio. I can't see any scenario where a person would be "trapped" into higher taxes as you've suggested.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Do most Bogleheads TLH?

Post by AspireToRetire » Thu Apr 16, 2020 4:02 pm

FIREchief wrote:
Thu Apr 16, 2020 3:15 pm
AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?

That’s my struggle.
Tax rate changes sometimes happen quickly, but never over night. Let's say that I TLH this year to capture $30K in losses and use $20K to offset gains or ordinary income over the next five years. In year six, Washington passes a LTCG tax increase to take effect Jan 1, of year seven. I just need to sell off enough assets in December of year six to generate $10K in gains and I'll "use up" my remaining losses before the higher tax rates take effect. I can sell them and rebuy immediately if I still want that fund in my portfolio. I can't see any scenario where a person would be "trapped" into higher taxes as you've suggested.
Except your example above is exactly that scenario.

All the funds that you are left with after loss harvesting are now at a lower cost basis. And you are now in year 7 with a higher capital gain should you want to sell, but you’re now “trapped” at a higher capital gains tax rate as well.

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Re: Do most Bogleheads TLH?

Post by FIREchief » Thu Apr 16, 2020 4:20 pm

AspireToRetire wrote:
Thu Apr 16, 2020 4:02 pm
FIREchief wrote:
Thu Apr 16, 2020 3:15 pm
AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?

That’s my struggle.
Tax rate changes sometimes happen quickly, but never over night. Let's say that I TLH this year to capture $30K in losses and use $20K to offset gains or ordinary income over the next five years. In year six, Washington passes a LTCG tax increase to take effect Jan 1, of year seven. I just need to sell off enough assets in December of year six to generate $10K in gains and I'll "use up" my remaining losses before the higher tax rates take effect. I can sell them and rebuy immediately if I still want that fund in my portfolio. I can't see any scenario where a person would be "trapped" into higher taxes as you've suggested.
Except your example above is exactly that scenario.

All the funds that you are left with after loss harvesting are now at a lower cost basis. And you are now in year 7 with a higher capital gain should you want to sell, but you’re now “trapped” at a higher capital gains tax rate as well.
No. I sell in December of year six to "unload" the rest of the "extra" gains at today's more attractive LTCG rates. It would be a form of tax gain harvesting. See the bolded text in my original message above.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Do most Bogleheads TLH?

Post by AspireToRetire » Thu Apr 16, 2020 4:48 pm

FIREchief wrote:
Thu Apr 16, 2020 4:20 pm
AspireToRetire wrote:
Thu Apr 16, 2020 4:02 pm
FIREchief wrote:
Thu Apr 16, 2020 3:15 pm
AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?

That’s my struggle.
Tax rate changes sometimes happen quickly, but never over night. Let's say that I TLH this year to capture $30K in losses and use $20K to offset gains or ordinary income over the next five years. In year six, Washington passes a LTCG tax increase to take effect Jan 1, of year seven. I just need to sell off enough assets in December of year six to generate $10K in gains and I'll "use up" my remaining losses before the higher tax rates take effect. I can sell them and rebuy immediately if I still want that fund in my portfolio. I can't see any scenario where a person would be "trapped" into higher taxes as you've suggested.
Except your example above is exactly that scenario.

All the funds that you are left with after loss harvesting are now at a lower cost basis. And you are now in year 7 with a higher capital gain should you want to sell, but you’re now “trapped” at a higher capital gains tax rate as well.
No. I sell in December of year six to "unload" the rest of the "extra" gains at today's more attractive LTCG rates. It would be a form of tax gain harvesting. See the bolded text in my original message above.
I understand your goal of offsetting gains. That’s fine. But how do you know you will have a gain in December right before tax changes six years from now anyway? You have zero control over what the market does the next seven years. What if it’s net losses for the next 6 years (like the Great Depression) and your gains only start to happen after the tax law changes?

Also, forget about the tax loss that you are about to offset in year six. What about the lower cost basis of the repurchased shares from six years prior? You are now stuck with a lower cost basis at a higher capital gains rate. Big whoop for the gains you offset. You have another double whammy now.

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Re: Do most Bogleheads TLH?

Post by FactualFran » Thu Apr 16, 2020 5:34 pm

I am a mostly passive investor and do not tax loss harvest in the meaning that it tends to have at Bogleheads.org.

I have invested in mutual funds subject to capital gain tax for about 35 years. I have intentionally realized a loss only twice, to avoid having an unusually high marginal rate. One of the times was earlier this year. I do not use Specific ID to maximize the tax loss for a sale.

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Re: Do most Bogleheads TLH?

Post by FIREchief » Thu Apr 16, 2020 6:07 pm

AspireToRetire wrote:
Thu Apr 16, 2020 4:48 pm
FIREchief wrote:
Thu Apr 16, 2020 4:20 pm
AspireToRetire wrote:
Thu Apr 16, 2020 4:02 pm
FIREchief wrote:
Thu Apr 16, 2020 3:15 pm
AspireToRetire wrote:
Wed Apr 15, 2020 11:12 pm
The thing that’s always bothered me about TLH is the fact that you reduce your cost basis. That means you will have more capital gains when you sell in the future.

And capital gains tax now is the lowest in modern history. So why would I defer it to a larger tax in the future?

That’s my struggle.
Tax rate changes sometimes happen quickly, but never over night. Let's say that I TLH this year to capture $30K in losses and use $20K to offset gains or ordinary income over the next five years. In year six, Washington passes a LTCG tax increase to take effect Jan 1, of year seven. I just need to sell off enough assets in December of year six to generate $10K in gains and I'll "use up" my remaining losses before the higher tax rates take effect. I can sell them and rebuy immediately if I still want that fund in my portfolio. I can't see any scenario where a person would be "trapped" into higher taxes as you've suggested.
Except your example above is exactly that scenario.

All the funds that you are left with after loss harvesting are now at a lower cost basis. And you are now in year 7 with a higher capital gain should you want to sell, but you’re now “trapped” at a higher capital gains tax rate as well.
No. I sell in December of year six to "unload" the rest of the "extra" gains at today's more attractive LTCG rates. It would be a form of tax gain harvesting. See the bolded text in my original message above.
I understand your goal of offsetting gains. That’s fine. But how do you know you will have a gain in December right before tax changes six years from now anyway? You have zero control over what the market does the next seven years. What if it’s net losses for the next 6 years (like the Great Depression) and your gains only start to happen after the tax law changes?

Also, forget about the tax loss that you are about to offset in year six. What about the lower cost basis of the repurchased shares from six years prior? You are now stuck with a lower cost basis at a higher capital gains rate. Big whoop for the gains you offset. You have another double whammy now.
If I've lowered my overall basis by $10K through TLH this year I can increase my overall basis by $10K at any time by simply selling enough of something to realize $10K in gains. The realized $10K in gains will be offset by the carryover of the $10K loss on my schedule D's.

Are you really focusing your tax planning on a great depression scenario where the government simultaneously initiates a large tax increase and you have absolutely no investments that have ever gained anything?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Do most Bogleheads TLH?

Post by JonnyDVM » Thu Apr 16, 2020 6:28 pm

FactualFran wrote:
Thu Apr 16, 2020 5:34 pm
I am a mostly passive investor and do not tax loss harvest in the meaning that it tends to have at Bogleheads.org.

I have invested in mutual funds subject to capital gain tax for about 35 years. I have intentionally realized a loss only twice, to avoid having an unusually high marginal rate. One of the times was earlier this year. I do not use Specific ID to maximize the tax loss for a sale.
This has nothing to do with passive vs active. Its lowering your taxes with a 3k tax deduction for doing 19 seconds of work. Turning lemons into slightly less sour lemons.
I’d trade it all for a little more | -C Montgomery Burns

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Re: Do most Bogleheads TLH?

Post by AspireToRetire » Thu Apr 16, 2020 6:41 pm

FIREchief wrote:
Thu Apr 16, 2020 6:07 pm
AspireToRetire wrote:
Thu Apr 16, 2020 4:48 pm
FIREchief wrote:
Thu Apr 16, 2020 4:20 pm
AspireToRetire wrote:
Thu Apr 16, 2020 4:02 pm
FIREchief wrote:
Thu Apr 16, 2020 3:15 pm


Tax rate changes sometimes happen quickly, but never over night. Let's say that I TLH this year to capture $30K in losses and use $20K to offset gains or ordinary income over the next five years. In year six, Washington passes a LTCG tax increase to take effect Jan 1, of year seven. I just need to sell off enough assets in December of year six to generate $10K in gains and I'll "use up" my remaining losses before the higher tax rates take effect. I can sell them and rebuy immediately if I still want that fund in my portfolio. I can't see any scenario where a person would be "trapped" into higher taxes as you've suggested.
Except your example above is exactly that scenario.

All the funds that you are left with after loss harvesting are now at a lower cost basis. And you are now in year 7 with a higher capital gain should you want to sell, but you’re now “trapped” at a higher capital gains tax rate as well.
No. I sell in December of year six to "unload" the rest of the "extra" gains at today's more attractive LTCG rates. It would be a form of tax gain harvesting. See the bolded text in my original message above.
I understand your goal of offsetting gains. That’s fine. But how do you know you will have a gain in December right before tax changes six years from now anyway? You have zero control over what the market does the next seven years. What if it’s net losses for the next 6 years (like the Great Depression) and your gains only start to happen after the tax law changes?

Also, forget about the tax loss that you are about to offset in year six. What about the lower cost basis of the repurchased shares from six years prior? You are now stuck with a lower cost basis at a higher capital gains rate. Big whoop for the gains you offset. You have another double whammy now.
If I've lowered my overall basis by $10K through TLH this year I can increase my overall basis by $10K at any time by simply selling enough of something to realize $10K in gains. The realized $10K in gains will be offset by the carryover of the $10K loss on my schedule D's.

Are you really focusing your tax planning on a great depression scenario where the government simultaneously initiates a large tax increase and you have absolutely no investments that have ever gained anything?
That’s fair enough, Fire Chief. I understand and thank you for going through the mental exercise with me.

Cheers! :beer

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Re: Do most Bogleheads TLH?

Post by SpiritDitch » Fri Apr 17, 2020 12:15 am

Thanks everyone for the replies.
Given the discussion this generated, perhaps it's not a complete no-brainer after all...

Let's say that I'm warming up to the idea of TLH though.
I currently have about 25k long-term losses and 2k short-term in VASGX.
Dividend reinvestment is off.
Can I simply exchange all lots with a loss with a combination of total stock, total international, total bond, total international bond*?
Or is it a wash sale because VASGX is made up of those 4 funds?

(*I would maybe go with Munis for the bond part to gain some tax-efficiency)

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Re: Do most Bogleheads TLH?

Post by JustinR » Fri Apr 17, 2020 12:34 am

It's like getting a free $1,000 every year.
Last edited by JustinR on Fri Apr 17, 2020 2:58 am, edited 1 time in total.

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Re: Do most Bogleheads TLH?

Post by iceport » Fri Apr 17, 2020 12:44 am

SpiritDitch wrote:
Fri Apr 17, 2020 12:15 am
Thanks everyone for the replies.
Given the discussion this generated, perhaps it's not a complete no-brainer after all...

Let's say that I'm warming up to the idea of TLH though.
I currently have about 25k long-term losses and 2k short-term in VASGX.
Dividend reinvestment is off.
Can I simply exchange all lots with a loss with a combination of total stock, total international, total bond, total international bond*?
Or is it a wash sale because VASGX is made up of those 4 funds?

(*I would maybe go with Munis for the bond part to gain some tax-efficiency)
The chance to harvest a $27k loss is a no-brainer to me. That's 9 years of offsetting $3k of ordinary income, if nothing else.

Yes, you can do the exchanges you propose without creating a wash sale, provided you aren't keeping any tax lots of VASGX that were purchased within the 61-day wash sale period (30 days before the TLH to 30 days after), in the taxable account or anywhere else. The combination of the 4 underlying holdings is not substantially identical to the single all-in-one fund.

But you need to consider the possibility of getting "stuck" in the substitute funds if they rack up unrealized capital gains before you can switch back after 30 days. So you should be willing to live with your substitute funds indefinitely. (That's not as big a concern with the bond funds, which are less likely to accumulate large capital gains.)

Another thought, to keep your taxable holdings simpler, would be to reallocate across your other accounts so that you hold the bonds in a tax-advantaged account, assuming you already hold some there. Or do you use all-in-one funds in your tax-advantaged accounts also?

Finally, as long as you are busting out of Vanguard's designed portfolio, I'd be inclined to skip the 6% allocation to international bonds. It's not a critical addition to the portfolio in any amount, but for a 6% allocation, it hardly seems worth the bother.
"Discipline matters more than allocation.” ─William Bernstein

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Re: Do most Bogleheads TLH?

Post by FIREchief » Fri Apr 17, 2020 1:21 am

AspireToRetire wrote:
Thu Apr 16, 2020 6:41 pm
FIREchief wrote:
Thu Apr 16, 2020 6:07 pm
AspireToRetire wrote:
Thu Apr 16, 2020 4:48 pm
FIREchief wrote:
Thu Apr 16, 2020 4:20 pm
AspireToRetire wrote:
Thu Apr 16, 2020 4:02 pm


Except your example above is exactly that scenario.

All the funds that you are left with after loss harvesting are now at a lower cost basis. And you are now in year 7 with a higher capital gain should you want to sell, but you’re now “trapped” at a higher capital gains tax rate as well.
No. I sell in December of year six to "unload" the rest of the "extra" gains at today's more attractive LTCG rates. It would be a form of tax gain harvesting. See the bolded text in my original message above.
I understand your goal of offsetting gains. That’s fine. But how do you know you will have a gain in December right before tax changes six years from now anyway? You have zero control over what the market does the next seven years. What if it’s net losses for the next 6 years (like the Great Depression) and your gains only start to happen after the tax law changes?

Also, forget about the tax loss that you are about to offset in year six. What about the lower cost basis of the repurchased shares from six years prior? You are now stuck with a lower cost basis at a higher capital gains rate. Big whoop for the gains you offset. You have another double whammy now.
If I've lowered my overall basis by $10K through TLH this year I can increase my overall basis by $10K at any time by simply selling enough of something to realize $10K in gains. The realized $10K in gains will be offset by the carryover of the $10K loss on my schedule D's.

Are you really focusing your tax planning on a great depression scenario where the government simultaneously initiates a large tax increase and you have absolutely no investments that have ever gained anything?
That’s fair enough, Fire Chief. I understand and thank you for going through the mental exercise with me.

Cheers! :beer
:sharebeer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Do most Bogleheads TLH?

Post by FactualFran » Fri Apr 17, 2020 5:34 pm

JonnyDVM wrote:
Thu Apr 16, 2020 6:28 pm
This has nothing to do with passive vs active. Its lowering your taxes with a 3k tax deduction for doing 19 seconds of work. Turning lemons into slightly less sour lemons.
A sentence in the opening post was: "I'm wondering if most people who consider themselves passive investors here do TLH." This discussion is about those who consider themselves passive investors.

I will very likely not have a 3k tax deduction this year, although I have realized a loss. The loss will very likely offset less than all of the capital gains. I won't know the net capital gains until late in the year. It takes more than 19 seconds of work for me to determine the cost or basis of the non-covered shares I sold and complete the income tax forms.

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Re: Do most Bogleheads TLH?

Post by SpiritDitch » Fri Apr 17, 2020 6:19 pm

iceport wrote:
Fri Apr 17, 2020 12:44 am
SpiritDitch wrote:
Fri Apr 17, 2020 12:15 am
Thanks everyone for the replies.
Given the discussion this generated, perhaps it's not a complete no-brainer after all...

Let's say that I'm warming up to the idea of TLH though.
I currently have about 25k long-term losses and 2k short-term in VASGX.
Dividend reinvestment is off.
Can I simply exchange all lots with a loss with a combination of total stock, total international, total bond, total international bond*?
Or is it a wash sale because VASGX is made up of those 4 funds?

(*I would maybe go with Munis for the bond part to gain some tax-efficiency)
The chance to harvest a $27k loss is a no-brainer to me. That's 9 years of offsetting $3k of ordinary income, if nothing else.

Yes, you can do the exchanges you propose without creating a wash sale, provided you aren't keeping any tax lots of VASGX that were purchased within the 61-day wash sale period (30 days before the TLH to 30 days after), in the taxable account or anywhere else. The combination of the 4 underlying holdings is not substantially identical to the single all-in-one fund.

But you need to consider the possibility of getting "stuck" in the substitute funds if they rack up unrealized capital gains before you can switch back after 30 days. So you should be willing to live with your substitute funds indefinitely. (That's not as big a concern with the bond funds, which are less likely to accumulate large capital gains.)

Another thought, to keep your taxable holdings simpler, would be to reallocate across your other accounts so that you hold the bonds in a tax-advantaged account, assuming you already hold some there. Or do you use all-in-one funds in your tax-advantaged accounts also?

Finally, as long as you are busting out of Vanguard's designed portfolio, I'd be inclined to skip the 6% allocation to international bonds. It's not a critical addition to the portfolio in any amount, but for a 6% allocation, it hardly seems worth the bother.
Thanks for the detailed tips.
I do have all-in-one (TR) funds in my tax-advantaged accounts, though I could consider exchanging some of those too.
For now, I did the following: sold shares of VASGX and bought 50% total stock, 33% total international, 17% intermediate CA Munis. Look reasonable?

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Re: Do most Bogleheads TLH?

Post by grabiner » Fri Apr 17, 2020 6:29 pm

SpiritDitch wrote:
Fri Apr 17, 2020 6:19 pm
I do have all-in-one (TR) funds in my tax-advantaged accounts, though I could consider exchanging some of those too.
For now, I did the following: sold shares of VASGX and bought 50% total stock, 33% total international, 17% intermediate CA Munis. Look reasonable?
Reasonable as long as you are a CA resident in the 22% or higher tax bracket, so that the CA munis are avoiding a tax of 31.3% on taxable bonds. In the 12% bracket, if you hold bonds in your taxable account at all, they should be taxable bonds.
Wiki David Grabiner

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Re: Do most Bogleheads TLH?

Post by SpiritDitch » Fri Apr 17, 2020 6:34 pm

grabiner wrote:
Fri Apr 17, 2020 6:29 pm
SpiritDitch wrote:
Fri Apr 17, 2020 6:19 pm
I do have all-in-one (TR) funds in my tax-advantaged accounts, though I could consider exchanging some of those too.
For now, I did the following: sold shares of VASGX and bought 50% total stock, 33% total international, 17% intermediate CA Munis. Look reasonable?
Reasonable as long as you are a CA resident in the 22% or higher tax bracket, so that the CA munis are avoiding a tax of 31.3% on taxable bonds. In the 12% bracket, if you hold bonds in your taxable account at all, they should be taxable bonds.
Yes, I fall in that category.
I realize there is a trade-off here between diversification and tax-efficiency.
I figure at some point in the next few years, as I start getting more conservative, I might buy total bond in my tax-advantaged accounts.

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Re: Do most Bogleheads TLH?

Post by iceport » Sat Apr 18, 2020 4:13 pm

SpiritDitch wrote:
Fri Apr 17, 2020 6:19 pm
Thanks for the detailed tips.
I do have all-in-one (TR) funds in my tax-advantaged accounts, though I could consider exchanging some of those too.
For now, I did the following: sold shares of VASGX and bought 50% total stock, 33% total international, 17% intermediate CA Munis. Look reasonable?
Yes, that looks reasonable. Are you sure you have created no partial wash sales, with any purchases of substantially identical assets in another account? Any dividend reinvestments or regular contributions into VASGX anywhere else?

BTW, you are finding out why the use of all-in-one funds in a taxable account can be problematic, beyond just being potentially tax-inefficient. Once you break out of an all-in-one fund in one account, it can complicate portfolio management rather than simplifying it.

One thing to consider, though it's a bit late, would be to use Vanguard Target Retirement 2040 Fund (VFORX) as a substitute fund. You'd be skating on very thin ice with respect to being substantially identical, but it wouldn't be the most blatant abuse I've ever seen advocated. I wouldn't do it because I do think it's substantially identical to VASGX, but others might not be as concerned. What you have done is far safer, from a wash sale standpoint. And you still could get "stuck" in it.
"Discipline matters more than allocation.” ─William Bernstein

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