Tax-loss Harvesting Timing

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ZMonet
Posts: 31
Joined: Sun Dec 15, 2019 2:43 pm

Tax-loss Harvesting Timing

Post by ZMonet » Tue Apr 21, 2020 7:14 am

My wife and I have been investing in strictly index funds for the last 10+ years. Since the market was largely going up during that time, I never really focused on tax-loss harvesting. I also didn't think it was applicable to me because I thought that you could only tax-loss harvest on the totality of the position, not the individual investment tranches. I recently read something on here that led me to believe that I can tax-loss harvest on X shares invested in an index fund on a specific date. Is this true?

If so, our situation is that 65% of my investments are in 401ks and Roths. I get that I can't tax-loss harvest on those. The other 35% are in Vanguard and are invested in VTSAX. We put in about $3k every month and have done approximately that for 8 years. We currently show about a $90k loss from the all-time highs, but the actual loss based on purchase dates is likely substantially less. If I want to tax-loss harvest on those: (1) Is there an easy way to figure out my current paper loss based on purchase dates on the Vanguard site?; (2) What do people do in terms of timing (I realize you can't time the market, either way, but what general principles do people apply; and (3) What fund would I exchange into for the 31 days? I realize I don't want to run afoul of the wash rule and that the IRD also has rules as to what substantially similar funds that you can't switch into.

Also, if anyone has any guides on the mechanics of the exchange, that would be awesome.

Thanks in advance for any help.

livesoft
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Re: Tax-loss Harvesting Timing

Post by livesoft » Tue Apr 21, 2020 7:22 am

1. Set the cost basis method of your Vanguard taxable VTSAX to Specific Identification. If you cannot do this, then you cannot pick the lots and Dates Acquired to sell and the rest of this response makes no sense.

2. After doing #1 above, the Vanguard web site will show you about the other things you asked. So wait for #1 to happen and take a look.

3. As for timing, a good time to TLH is at the Market Low when the losses are greatest. That would be March 23, 2020 so far this year. But another good time to TLH is 31 days before the market low if you have losses. That's because your new replacement investment will then have 30 days of losses and you can TLH back into your original fund on the market low of the year.

4. I cringed when I saw you use "substantially similar" which is not a term the IRS ever uses. One can use substantially similar funds all they want to and not create a wash sale.
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desiderium
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Re: Tax-loss Harvesting Timing

Post by desiderium » Tue Apr 21, 2020 7:37 am

(1) First, go to the account maintenance tab and switch the cost basis method to "specid". This can take a day or two to manifest. After that, when you look at your account and click on "cost basis" it will lay out each lot and the gain and loss. Then, when you sell shares or exchange them, it will ask you to specify which lots to sell.

(2) Don't worry too much about timing. It's more about establishing a habit. With all the market volatility, it is often easy to look on larger down days and find out that you have losses to harvest.

(3) Most people exchange to a fund that has similar performance and low cost. You can find that the fund you switch into goes up a lot in 31 days, and that switching back is not desirable. Use something that you can hold forever. Many people would use an S&P 500 fund to harvest losses on VTSAX, for example. There is nothing wrong with wash sales, they just negate the benefits of tax loss harvesting (usually only partially). To avoid, turn off automatic reinvesting of dividends. Don't forget to do this in your tax-deferred accounts as well if you hold the same funds. There are other nuances, like if you sell shares you have held less than 60 days (can happen in rapid cycles of harvesting), dividends received on those shares are no longer qualified. The IRS rules on "substantially identical" funds are not completely clear. The easiest approach is to search on this forum. For example "VTSAX TLH partner"

It's worth checking the WIKI and reading some of the many threads on this subject. Once you do it a few times it will become second nature.

Good luck

BruinBones
Posts: 152
Joined: Sun Apr 22, 2018 5:39 pm

Re: Tax-loss Harvesting Timing

Post by BruinBones » Tue Apr 21, 2020 7:39 am

Many on this board recommend VFIAX (Vanguard S&P 500 Index Fund) or VLCAX (Vanguard Large Cap Index Fund) as TLH partners for VTSAX.

Topic Author
ZMonet
Posts: 31
Joined: Sun Dec 15, 2019 2:43 pm

Re: Tax-loss Harvesting Timing

Post by ZMonet » Tue Apr 21, 2020 7:44 am

Thanks, Livesoft, Desiderium, and BruinBones. Very helpful! I set the cost basis method as specific identification but, as Desiderium pointed out, Vanguard says I'll need to wait because my information isn't available yet. In the interim, I'll read up.

koryg75
Posts: 55
Joined: Sun Feb 01, 2015 8:48 am

Re: Tax-loss Harvesting Timing

Post by koryg75 » Tue Apr 21, 2020 7:46 am

If I have automatic reinvest selected for my IRA that would create a wash on my TLH in the brokerage account?

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

Re: Tax-loss Harvesting Timing

Post by livesoft » Tue Apr 21, 2020 7:47 am

koryg75 wrote:
Tue Apr 21, 2020 7:46 am
If I have automatic reinvest selected for my IRA that would create a wash on my TLH in the [my taxable] brokerage account?
Yes, possibly, but not automatically and not always. But any such wash sale may be of little consequence and would certainly not be illegal.

One can have brokerage accounts in their IRA, so I edited your question to note that your need to be talking about a potential wash sale in your taxable account where you will be doing the TLH.
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koryg75
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Re: Tax-loss Harvesting Timing

Post by koryg75 » Tue Apr 21, 2020 8:06 am

livesoft wrote:
Tue Apr 21, 2020 7:47 am
koryg75 wrote:
Tue Apr 21, 2020 7:46 am
If I have automatic reinvest selected for my IRA that would create a wash on my TLH in the [my taxable] brokerage account?
Yes, possibly, but not automatically and not always. But any such wash sale may be of little consequence and would certainly not be illegal.

One can have brokerage accounts in their IRA, so I edited your question to note that your need to be talking about a potential wash sale in your taxable account where you will be doing the TLH.
Thanks for the warning. Anyone know if this applies to vanguard accounts?

livesoft
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Re: Tax-loss Harvesting Timing

Post by livesoft » Tue Apr 21, 2020 8:08 am

koryg75 wrote:
Tue Apr 21, 2020 8:06 am
Thanks for the warning. Anyone know if this applies to vanguard accounts?
I don't understand your question. It applies to all accounts that you (and/or your spouse) controls whether Vanguard or not. See the IRS rules please.
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grabiner
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Re: Tax-loss Harvesting Timing

Post by grabiner » Tue Apr 21, 2020 10:32 pm

koryg75 wrote:
Tue Apr 21, 2020 8:06 am
livesoft wrote:
Tue Apr 21, 2020 7:47 am
koryg75 wrote:
Tue Apr 21, 2020 7:46 am
If I have automatic reinvest selected for my IRA that would create a wash on my TLH in the [my taxable] brokerage account?
Yes, possibly, but not automatically and not always. But any such wash sale may be of little consequence and would certainly not be illegal.

One can have brokerage accounts in their IRA, so I edited your question to note that your need to be talking about a potential wash sale in your taxable account where you will be doing the TLH.
Thanks for the warning. Anyone know if this applies to vanguard accounts?
Legally, it applies to Vanguard accounts. Vanguard won't report it because brokerages are only required to report wash sales on identical securities in the same account. But it is your legal obligation to report all wash sales on Form 8949 when you file your taxes, whether the brokerage knows about them or not.
Wiki David Grabiner

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