Tax loss harvesting

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l1am
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Tax loss harvesting

Post by l1am » Sun May 31, 2020 2:44 am

Am I misunderstanding TLH or is it just essentially deferring CG taxes (via cost basis adjustment)?

Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?

Penguin
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Re: Tax loss harvesting

Post by Penguin » Sun May 31, 2020 5:47 am

l1am wrote:
Sun May 31, 2020 2:44 am
Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?
Here is one example:
Today you sell a stock for $100,000 capital loss.
Later you sell your home or business for a large capital gain.
You can reduce that capital gain by subtracting any remaining capital loss carryover. In doing so you can reduce the tax on the capital gain, perhaps to zero.
Jon

JustinR
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Re: Tax loss harvesting

Post by JustinR » Sun May 31, 2020 6:14 am

You can do $3k a year but it carries over. So if you TLH $9k this year you can deduct $3k this year, $3k next year, and $3k the year after that.

Yes your basis gets lowered but you can sell when your tax bracket is lower than it is now (like during retirement) and you'll come out ahead.

Also, deferring taxes in general makes you richer due to the money you kept growing. Read: https://www.bogleheads.org/wiki/Tax_bas ... _deferment

There's virtually no reason not to TLH and deduct $3k every year.

fundseeker
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Re: Tax loss harvesting

Post by fundseeker » Sun May 31, 2020 6:27 am

It is true that you may have huge gain to pay CG taxes on down the road, however, you can avoid that by donating the appreciated funds to charities.

You get the most bang for your buck by donating two years of your charitable giving every other year to a donor advised fund (DAF) that you can easily set up at Fidelity (better choice) or Vanguard, and then direct money from your DAF to your charity at any time you want to.

We had huge gains from having TLH'd in 2009ish, and three years ago we donated ~$40k of funds to our DAF and last year ~$30k. We got a tax break twice :)

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House Blend
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Re: Tax loss harvesting

Post by House Blend » Sun May 31, 2020 8:53 am

l1am wrote:
Sun May 31, 2020 2:44 am
Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?
So, you are dismissing the value of postponing CG taxes?

Suppose that a large fraction of your taxable account will be passed on to your beneficiaries, or donated to charity. If you harvest enough losses during a crash, you could end up never paying CG tax for the rest of your life. And your heirs will get a stepped-up basis on what's left.

occambogle
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Re: Tax loss harvesting

Post by occambogle » Sun May 31, 2020 9:12 am

JustinR wrote:
Sun May 31, 2020 6:14 am
You can do $3k a year but it carries over. So if you TLH $9k this year you can deduct $3k this year, $3k next year, and $3k the year after that.
As a total newbie in this regard.... I only got a brokerage in January this year, and have never had capital gains/losses on my tax return before. A couple questions:

- When the brokerage gives you the tax summary at the end of the year, is it a simple matter of listing STCG, STCL, LTCG & LTCL? Or do you need to make calculations for everything?

- And say you have $10k losses this year, and claim $3k against ordinary income. What happens to the other $7k? Do you have to keep track of it yourself and claim 3k per year providing records for it every year? Or do you claim it all in that year but then the IRS keeps track of it somehow and deducts 3k each year? I'm just trying to work out how much record-keeping and complexity is involved.

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House Blend
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Re: Tax loss harvesting

Post by House Blend » Sun May 31, 2020 9:31 am

occambogle wrote:
Sun May 31, 2020 9:12 am
JustinR wrote:
Sun May 31, 2020 6:14 am
You can do $3k a year but it carries over. So if you TLH $9k this year you can deduct $3k this year, $3k next year, and $3k the year after that.
As a total newbie in this regard.... I only got a brokerage in January this year, and have never had capital gains/losses on my tax return before. A couple questions:

- When the brokerage gives you the tax summary at the end of the year, is it a simple matter of listing STCG, STCL, LTCG & LTCL? Or do you need to make calculations for everything?

- And say you have $10k losses this year, and claim $3k against ordinary income. What happens to the other $7k? Do you have to keep track of it yourself and claim 3k per year providing records for it every year? Or do you claim it all in that year but then the IRS keeps track of it somehow and deducts 3k each year? I'm just trying to work out how much record-keeping and complexity is involved.
You should look at Schedule D, and its instructions.

Short version: the first year you have a sale of capital assets, in most cases, you can simply copy the numbers from your brokerage 1099-B onto that form.

In general, to fill out Schedule D for Year N, you need your Schedule D for year N-1 and your 1099-B for year N.

There is a worksheet in the instructions for Schedule D that shows how this data feeds into the year N Schedule D.

Penguin
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Re: Tax loss harvesting

Post by Penguin » Sun May 31, 2020 9:37 am

occambogle wrote:
Sun May 31, 2020 9:12 am
JustinR wrote:
Sun May 31, 2020 6:14 am
You can do $3k a year but it carries over. So if you TLH $9k this year you can deduct $3k this year, $3k next year, and $3k the year after that.
As a total newbie in this regard.... I only got a brokerage in January this year, and have never had capital gains/losses on my tax return before. A couple questions:

- When the brokerage gives you the tax summary at the end of the year, is it a simple matter of listing STCG, STCL, LTCG & LTCL? Or do you need to make calculations for everything?

- And say you have $10k losses this year, and claim $3k against ordinary income. What happens to the other $7k? Do you have to keep track of it yourself and claim 3k per year providing records for it every year? Or do you claim it all in that year but then the IRS keeps track of it somehow and deducts 3k each year? I'm just trying to work out how much record-keeping and complexity is involved.
There is not much record keeping or complexity but you must keep track of the capital loss carryover.
The IRS provides a worksheet that is automatically printed out by tax software. You should save it.
https://www.irs.gov/pub/irs-prior/i1040 ... df#page=11
House Blend beat me to it.
Jon

kaneohe
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Re: Tax loss harvesting

Post by kaneohe » Sun May 31, 2020 9:52 am

occambogle wrote:
Sun May 31, 2020 9:12 am
........................................................................................................

- And say you have $10k losses this year, and claim $3k against ordinary income. What happens to the other $7k? Do you have to keep track of it yourself and claim 3k per year providing records for it every year? Or do you claim it all in that year but then the IRS keeps track of it somehow and deducts 3k each year? I'm just trying to work out how much record-keeping and complexity is involved.
You show both the 10K losses and the 3K used on Sch D.........so the 7K remaining is implicitly known and you use
that the next yr and show it as a carryover loss on Sch D. As mentioned by others, the capital loss carryover wksht will also track that. Remember that any loss is used first against any capital gains before any remainder is used against ordinary income at max 3K/yr.

occambogle
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Re: Tax loss harvesting

Post by occambogle » Sun May 31, 2020 9:54 am

@House Blend and @paneguin - Thanks a lot for that, appreciated.
Seems not so hard... although I notice from the instructions the annual amount you can deduct is only $1,500 for married filing separately.

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Flobes
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Re: Tax loss harvesting

Post by Flobes » Sun May 31, 2020 9:59 am

l1am wrote:
Sun May 31, 2020 2:44 am
Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?
For those who are dancing on the AGI/MAGI line for certain benefits, starting a 1040 with minus $3000 can be very helpful for garnering particular tax credits and meeting some phaseout limits.

Examples: qualifying for ACA subsidies, Roth contributions, IRA deductibility, child tax credit, savers credit, student loans interest deduction, getting under IRMAA lines, taxability of Social Security income, education credits, medical deductions, and the list goes on and on.

stan1
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Re: Tax loss harvesting

Post by stan1 » Sun May 31, 2020 10:07 am

occambogle wrote:
Sun May 31, 2020 9:54 am
@House Blend and @paneguin - Thanks a lot for that, appreciated.
Seems not so hard... although I notice from the instructions the annual amount you can deduct is only $1,500 for married filing separately.
Married filing separately is always an outlier special case and few people do it. If you file as MFS you'll need to validate every piece of advice you see on the internet and even everything you read in IRS publications.

occambogle
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Re: Tax loss harvesting

Post by occambogle » Sun May 31, 2020 10:09 am

stan1 wrote:
Sun May 31, 2020 10:07 am
Married filing separately is always an outlier special case and few people do it. If you file as MFS you'll need to validate every piece of advice you see on the internet and even everything you read in IRS publications.
Very true... and almost every situation I come across is both different, and almost always worse, in the case of MFS. It's very annoying.

JustinR
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Re: Tax loss harvesting

Post by JustinR » Sun May 31, 2020 10:27 am

occambogle wrote:
Sun May 31, 2020 9:12 am
JustinR wrote:
Sun May 31, 2020 6:14 am
You can do $3k a year but it carries over. So if you TLH $9k this year you can deduct $3k this year, $3k next year, and $3k the year after that.
As a total newbie in this regard.... I only got a brokerage in January this year, and have never had capital gains/losses on my tax return before. A couple questions:

- When the brokerage gives you the tax summary at the end of the year, is it a simple matter of listing STCG, STCL, LTCG & LTCL? Or do you need to make calculations for everything?

- And say you have $10k losses this year, and claim $3k against ordinary income. What happens to the other $7k? Do you have to keep track of it yourself and claim 3k per year providing records for it every year? Or do you claim it all in that year but then the IRS keeps track of it somehow and deducts 3k each year? I'm just trying to work out how much record-keeping and complexity is involved.
1) I use TaxAct online and it calculates everything for me once I input the STCG, STCL, LTCG & LTCL from the brokerage 1099-Bs.

2) With TaxAct after the Schedule D there's a "Capital Loss Carryover Worksheet (Keep for Your Records)" that tells you how much you have left for next year. Although it's easy to figure out how much you have left on Schedule D (on the 2018 form, it's line 16 minus line 21). But yes, you or your software has to keep track of it yourself and use it next year.

occambogle
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Re: Tax loss harvesting

Post by occambogle » Sun May 31, 2020 10:59 am

Do you just need to keep track of the annual totals of the STCG, STCL, LTCG & LTCL that your broker sends you? Or do you need to keep track of every detail like this stock had these gains, this stock had this loss and this gain, etc?

fyre4ce
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Re: Tax loss harvesting

Post by fyre4ce » Sun May 31, 2020 11:33 am

You're not missing the basic concept, but you are missing some ways that TLH can be advantageous:
  • By taking a deduction now of unlimited amount of capital gains, and $3,000 of other income, you're effectively receiving an interest-free loan from the government. This money can be invested and generate returns before you need to pay it back.
  • Ordinary income and short-term capital gains are taxed at a higher rate than long-term gains, so if you deduct at a higher rate and pay later at a lower rate, there's an additional tax savings.
  • If you take the deduction while living in a higher-tax state and later pay capital gains tax while living in a lower-tax state (common when talking about working years vs. retirement), there's an additional tax savings.
  • Most people's marginal tax rate is lower in retirement than while working. If your tax rate is lower due to lower taxable income when you deduct vs. when you withdraw, there's an additional tax savings.
  • Appreciated shares can be donated to charity, so you may never pay the capital gains tax.
  • Appreciated shares receive a step-up in basis at death, so if you hold the shares until you die, you'll never pay the capital gains tax.
Hope that helps.
Last edited by fyre4ce on Sun May 31, 2020 10:28 pm, edited 1 time in total.

JustinR
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Re: Tax loss harvesting

Post by JustinR » Sun May 31, 2020 12:02 pm

occambogle wrote:
Sun May 31, 2020 10:59 am
Do you just need to keep track of the annual totals of the STCG, STCL, LTCG & LTCL that your broker sends you? Or do you need to keep track of every detail like this stock had these gains, this stock had this loss and this gain, etc?
I mean you should have a general idea of what you sold this year and how much you gained/lost.

And make sure the totals that your broker sent you are accurate.

But yes, your brokerage should send you that info during tax time.

Not sure what you're asking...you should definitely double check yourself to make sure everything's correct anyway.

TropikThunder
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Re: Tax loss harvesting

Post by TropikThunder » Sun May 31, 2020 12:53 pm

occambogle wrote:
Sun May 31, 2020 10:59 am
Do you just need to keep track of the annual totals of the STCG, STCL, LTCG & LTCL that your broker sends you? Or do you need to keep track of every detail like this stock had these gains, this stock had this loss and this gain, etc?
If you look at Schedule D, you’ll see that line1a is for “Totals for all short-term transactions reported on Form 1099-B” and line 8a is the same for long-term. If you have 1099-B’s from multiple brokerages, you can just enter the combined totals. Obviously you should know what transactions you made, but the 1040 doesn’t require all the details be entered.
https://www.irs.gov/pub/irs-pdf/f1040sd.pdf

kaneohe
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Re: Tax loss harvesting

Post by kaneohe » Sun May 31, 2020 2:58 pm

fyre4ce wrote:
Sun May 31, 2020 11:33 am
..........................................

[*]Ordinary income and short-term capital gains are taxed at a lower rate than long-term gains, so if you deduct at a higher rate and pay later at a lower rate, there's an additional tax savings.

........................................................................
might want to rewrite this part?

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TomatoTomahto
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Re: Tax loss harvesting

Post by TomatoTomahto » Sun May 31, 2020 3:10 pm

kaneohe wrote:
Sun May 31, 2020 2:58 pm
fyre4ce wrote:
Sun May 31, 2020 11:33 am
..........................................

[*]Ordinary income and short-term capital gains are taxed at a lower rate than long-term gains, so if you deduct at a higher rate and pay later at a lower rate, there's an additional tax savings.

........................................................................
might want to rewrite this part?
Thanks. I read it 3 times before deciding it wasn’t me having a moment.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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FIREchief
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Re: Tax loss harvesting

Post by FIREchief » Sun May 31, 2020 3:49 pm

House Blend wrote:
Sun May 31, 2020 8:53 am
l1am wrote:
Sun May 31, 2020 2:44 am
Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?
So, you are dismissing the value of postponing CG taxes?

Suppose that a large fraction of your taxable account will be passed on to your beneficiaries, or donated to charity. If you harvest enough losses during a crash, you could end up never paying CG tax for the rest of your life. And your heirs will get a stepped-up basis on what's left.
This is a great point. Also, you may not currently be in a position to cap income at the top of the zero percent LTCG range, but may be in a year or two. This also provides an immediate reduction of gains (plus possibly $3K ordinary income offset) while never having to pay taxes on the postponed gains. I'm in this situation right now, and harvested some meaningful losses in April.
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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l1am
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Re: Tax loss harvesting

Post by l1am » Sun May 31, 2020 6:01 pm

House Blend wrote:
Sun May 31, 2020 8:53 am
l1am wrote:
Sun May 31, 2020 2:44 am
Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?
So, you are dismissing the value of postponing CG taxes?

Suppose that a large fraction of your taxable account will be passed on to your beneficiaries, or donated to charity. If you harvest enough losses during a crash, you could end up never paying CG tax for the rest of your life. And your heirs will get a stepped-up basis on what's left.
No, I'm not dismissing the value of postponing taxes. I'm saying if I have zero intention of selling any shares for the next few years, should I bother going through the effort (pausing reinvestments, tax filing pain etc.) of capturing STCLs beyond the $3k?

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FIREchief
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Re: Tax loss harvesting

Post by FIREchief » Sun May 31, 2020 6:34 pm

l1am wrote:
Sun May 31, 2020 6:01 pm
House Blend wrote:
Sun May 31, 2020 8:53 am
l1am wrote:
Sun May 31, 2020 2:44 am
Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?
So, you are dismissing the value of postponing CG taxes?

Suppose that a large fraction of your taxable account will be passed on to your beneficiaries, or donated to charity. If you harvest enough losses during a crash, you could end up never paying CG tax for the rest of your life. And your heirs will get a stepped-up basis on what's left.
No, I'm not dismissing the value of postponing taxes. I'm saying if I have zero intention of selling any shares for the next few years, should I bother going through the effort (pausing reinvestments, tax filing pain etc.) of capturing STCLs beyond the $3k?
Probably. For the reasons 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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grabiner
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Re: Tax loss harvesting

Post by grabiner » Sun May 31, 2020 7:14 pm

occambogle wrote:
Sun May 31, 2020 10:59 am
Do you just need to keep track of the annual totals of the STCG, STCL, LTCG & LTCL that your broker sends you? Or do you need to keep track of every detail like this stock had these gains, this stock had this loss and this gain, etc?
For covered shares (bought in 2012 or later), your brokerage should keep track for you; if the 1099-B from your brokerage is right, you can just copy the total gains and losses of each type to your Schedule D.

If you have non-covered shares (older shares, or shares that the brokerage does not know the basis of for some reason), or if the brokerage's numbers on covered shares are incorrect (wash sale the brokerage didn't know about, incorrect basis on stock granted by your employer), you have to report each sale on a Form 8949. You will need to keep track of the numbers, but you can lump multiple lots of the same type into a single line, reporting "Various" as the purchase date.
Wiki David Grabiner

JustinR
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Re: Tax loss harvesting

Post by JustinR » Sun May 31, 2020 10:15 pm

l1am wrote:
Sun May 31, 2020 6:01 pm
House Blend wrote:
Sun May 31, 2020 8:53 am
l1am wrote:
Sun May 31, 2020 2:44 am
Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?
So, you are dismissing the value of postponing CG taxes?

Suppose that a large fraction of your taxable account will be passed on to your beneficiaries, or donated to charity. If you harvest enough losses during a crash, you could end up never paying CG tax for the rest of your life. And your heirs will get a stepped-up basis on what's left.
No, I'm not dismissing the value of postponing taxes. I'm saying if I have zero intention of selling any shares for the next few years, should I bother going through the effort (pausing reinvestments, tax filing pain etc.) of capturing STCLs beyond the $3k?
I don't know. Do you want to make an extra ~$1,000 a year for almost no effort?

I mean if the losses are big enough (like if say, a global pandemic happened) you could do one transaction and set yourself up for the next several years. So you made $5k by doing one transaction.

How much more "yes TLH is always worth it" do you need to hear?

Edit: The only reason you shouldn't do it is if you have no taxes to offset this year or in the upcoming years.
Last edited by JustinR on Mon Jun 01, 2020 12:03 am, edited 1 time in total.

fyre4ce
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Re: Tax loss harvesting

Post by fyre4ce » Sun May 31, 2020 10:28 pm

kaneohe wrote:
Sun May 31, 2020 2:58 pm
fyre4ce wrote:
Sun May 31, 2020 11:33 am
..........................................

[*]Ordinary income and short-term capital gains are taxed at a lower rate than long-term gains, so if you deduct at a higher rate and pay later at a lower rate, there's an additional tax savings.

........................................................................
might want to rewrite this part?
Fixed. Sorry about that.

the way
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Re: Tax loss harvesting

Post by the way » Sun May 31, 2020 10:39 pm

JustinR wrote:
Sun May 31, 2020 10:15 pm
I mean if the losses are big enough (like if say, a global pandemic happened) you could do one transaction and set yourself up for the next several years. So you made $5k by doing one transaction.

How much more "yes TLH is always worth it" do you need to hear?
Global pandemic? Don't be silly, that'll never happen. :happy

The one problem with capital loss carryovers is that you can't choose not to use it each year. I was carrying a large loss for a couple of years during very low income and it was a total waste (particularly painful if you are in the 0% LTCG bracket).

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House Blend
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Re: Tax loss harvesting

Post by House Blend » Mon Jun 01, 2020 10:16 am

l1am wrote:
Sun May 31, 2020 6:01 pm
House Blend wrote:
Sun May 31, 2020 8:53 am
l1am wrote:
Sun May 31, 2020 2:44 am
Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?
So, you are dismissing the value of postponing CG taxes?

Suppose that a large fraction of your taxable account will be passed on to your beneficiaries, or donated to charity. If you harvest enough losses during a crash, you could end up never paying CG tax for the rest of your life. And your heirs will get a stepped-up basis on what's left.
No, I'm not dismissing the value of postponing taxes. I'm saying if I have zero intention of selling any shares for the next few years, should I bother going through the effort (pausing reinvestments, tax filing pain etc.) of capturing STCLs beyond the $3k?
It's still a bit unclear where you are coming from.

I can suggest that if you have large unrealized losses available to take now, then you should take them. The larger the losses, the more compelling it is to take them. One can quibble about how large is large, but if you've never used TLH before, then you should do it even if the loss is small.

Your hints ("tax filing pain", "pausing reinvestments") suggest that you don't have much TLH experience. The tax filing pain should go away once you gain that experience. If it doesn't, then you're doing it wrong.

Regarding auto-reinvestment of dividends, IMO one should stop that, and not merely pause, if TLH is to be part of your investing strategy. Instead, collect all dividends in cash and redeploy where most needed. For example, if you harvest losses from Fund A to Fund B, then an ill-timed dividend from A that would have created a wash sale can instead to go to B, or to a fund in an entirely different asset class that is farther below target.

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FIREchief
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Re: Tax loss harvesting

Post by FIREchief » Mon Jun 01, 2020 10:50 am

House Blend wrote:
Mon Jun 01, 2020 10:16 am
Your hints ("tax filing pain", "pausing reinvestments") suggest that you don't have much TLH experience. The tax filing pain should go away once you gain that experience. If it doesn't, then you're doing it wrong.
Yep. I've insisted on preparing my own tax returns since I got my first job at 16 years old. "Tax filing pain," is really "Tax filing gain," when you look at the educational aspects. It forces at least a free annual refresher course and many come with extra learning.
Last edited by FIREchief on Mon Jun 01, 2020 11:16 am, edited 1 time in total.
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firebirdparts
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Re: Tax loss harvesting

Post by firebirdparts » Mon Jun 01, 2020 11:06 am

l1am wrote:
Sun May 31, 2020 6:01 pm
No, I'm not dismissing the value of postponing taxes. I'm saying if I have zero intention of selling any shares for the next few years, should I bother going through the effort (pausing reinvestments, tax filing pain etc.) of capturing STCLs beyond the $3k?
I haven't posted here all that long, but I think this question gets asked about once a month, and the answers are pretty confusing to me. I would much prefer if people would be clear that they have some plan to stay the course on investments. There needs to be a distinction made that we are talking here about you reinvesting immediately in something that you think has the same potential. Financially, there's not much reason you wouldn't do it. Administratively, you do have to pick a fund and file another form on your taxes. If you delay capital gains taxes, that is probably beneficial beyond just the delay.
A fool and your money are soon partners

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FIREchief
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Re: Tax loss harvesting

Post by FIREchief » Mon Jun 01, 2020 11:18 am

firebirdparts wrote:
Mon Jun 01, 2020 11:06 am
Administratively, you do have to pick a fund and file another form on your taxes.
Are you referring to schedule D?
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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grabiner
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Re: Tax loss harvesting

Post by grabiner » Mon Jun 01, 2020 11:47 am

FIREchief wrote:
Mon Jun 01, 2020 11:18 am
firebirdparts wrote:
Mon Jun 01, 2020 11:06 am
Administratively, you do have to pick a fund and file another form on your taxes.
Are you referring to schedule D?
Schedule D needs to be filed if you have any capital gains or losses, including gains distributed by your funds.

Form 8949 needs to be filed if you have any capital gains or losses which were not reported to the IRS on a 1099-B (non-covered shares), or for which the reporting on the 1099-B is incorrect.
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FIREchief
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Re: Tax loss harvesting

Post by FIREchief » Mon Jun 01, 2020 12:02 pm

grabiner wrote:
Mon Jun 01, 2020 11:47 am
FIREchief wrote:
Mon Jun 01, 2020 11:18 am
firebirdparts wrote:
Mon Jun 01, 2020 11:06 am
Administratively, you do have to pick a fund and file another form on your taxes.
Are you referring to schedule D?
Schedule D needs to be filed if you have any capital gains or losses, including gains distributed by your funds.

Form 8949 needs to be filed if you have any capital gains or losses which were not reported to the IRS on a 1099-B (non-covered shares), or for which the reporting on the 1099-B is incorrect.
Yeah, I just wanted to confirm that was what the poster was referring to. To clarity, if the only capital gains you have are capital gains distributions, than I don't believe that Schedule D is required. My point was going to be that if there were any gains from sales of assets, than Schedule D would be required anyways and the fact that a person had TLH'd would NOT by itself require an "additional form." Just one more line entry on Schedule D. To your point, it might require an additional form (8949) if the shares sold were non-covered and there were no other non-covered share sales. (see my signature).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

JonnyB
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Re: Tax loss harvesting

Post by JonnyB » Mon Jun 01, 2020 12:18 pm

Penguin wrote:
Sun May 31, 2020 5:47 am
l1am wrote:
Sun May 31, 2020 2:44 am
Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?
Here is one example:
1. Today you sell a stock for $100,000 capital loss.
2. Later you sell your home or business for a large capital gain.
3. You can reduce that capital gain by subtracting any remaining capital loss carryover. In doing so you can reduce the tax on the capital gain, perhaps to zero.
Don't forget step 4. You increase your future taxable capital gains by $100,000 on your replacement shares.

There may be benefits to delaying that taxation but it's not exactly a free lunch.
JustinR wrote:
Sun May 31, 2020 10:15 pm
Do you want to make an extra ~$1,000 a year for almost no effort?
You've forgotten that you've increased your future capital gains. Your net savings is the difference between your ordinary tax rate and the capital gains tax rate. Let's say 22% minus 15% is 7%. So your net savings on the $3,000 deduction is $210, not $1,000.

Better than a poke in the eye, but not a free lunch.

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FIREchief
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Re: Tax loss harvesting

Post by FIREchief » Mon Jun 01, 2020 12:54 pm

JonnyB wrote:
Mon Jun 01, 2020 12:18 pm
Penguin wrote:
Sun May 31, 2020 5:47 am
l1am wrote:
Sun May 31, 2020 2:44 am
Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?
Here is one example:
1. Today you sell a stock for $100,000 capital loss.
2. Later you sell your home or business for a large capital gain.
3. You can reduce that capital gain by subtracting any remaining capital loss carryover. In doing so you can reduce the tax on the capital gain, perhaps to zero.
Don't forget step 4. You increase your POTENTIAL future taxable capital gains by $100,000 on your replacement shares.

There may be benefits to delaying that taxation but it's not exactly a free lunch.
Fixed. As has been pointed out several times in this thread, there is no guarantee that taxes will ever be paid on those deferred gains. We've pointed out at least two very common scenarios (step up basis and zero percent LTCG taxable income years). IOW, it absolutely can wind up being a free lunch. 8-)
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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grabiner
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Re: Tax loss harvesting

Post by grabiner » Mon Jun 01, 2020 12:58 pm

FIREchief wrote:
Mon Jun 01, 2020 12:54 pm
JonnyB wrote:
Mon Jun 01, 2020 12:18 pm
Don't forget step 4. You increase your POTENTIAL future taxable capital gains by $100,000 on your replacement shares.

There may be benefits to delaying that taxation but it's not exactly a free lunch.
Fixed. As has been pointed out several times in this thread, there is no guarantee that taxes will ever be paid on those deferred gains. We've pointed out at least two very common scenarios (step up basis and zero percent LTCG taxable income years). IOW, it absolutely can wind up being a free lunch. 8-)
And a third is donation to charity. I harvested losses in 2001-2002 and have donated most of the replacement shares, so I never paid the capital-gains tax. I have used up almost all of those, so my future charitable donations will be with replacement shares from my tax loss harvest in 2008-2009.
Wiki David Grabiner

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FIREchief
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Re: Tax loss harvesting

Post by FIREchief » Mon Jun 01, 2020 1:01 pm

grabiner wrote:
Mon Jun 01, 2020 12:58 pm
FIREchief wrote:
Mon Jun 01, 2020 12:54 pm
JonnyB wrote:
Mon Jun 01, 2020 12:18 pm
Don't forget step 4. You increase your POTENTIAL future taxable capital gains by $100,000 on your replacement shares.

There may be benefits to delaying that taxation but it's not exactly a free lunch.
Fixed. As has been pointed out several times in this thread, there is no guarantee that taxes will ever be paid on those deferred gains. We've pointed out at least two very common scenarios (step up basis and zero percent LTCG taxable income years). IOW, it absolutely can wind up being a free lunch. 8-)
And a third is donation to charity. I harvested losses in 2001-2002 and have donated most of the replacement shares, so I never paid the capital-gains tax. I have used up almost all of those, so my future charitable donations will be with replacement shares from my tax loss harvest in 2008-2009.
Yep. For anybody who hasn't already fully funded their DAF until QCD age, this is another excellent strategy. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

JustinR
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Re: Tax loss harvesting

Post by JustinR » Tue Jun 02, 2020 5:08 pm

JonnyB wrote:
Mon Jun 01, 2020 12:18 pm
Penguin wrote:
Sun May 31, 2020 5:47 am
l1am wrote:
Sun May 31, 2020 2:44 am
Besides the $3k income offset, Is there any advantage to _actively_ selling stock just to TLH?
Here is one example:
1. Today you sell a stock for $100,000 capital loss.
2. Later you sell your home or business for a large capital gain.
3. You can reduce that capital gain by subtracting any remaining capital loss carryover. In doing so you can reduce the tax on the capital gain, perhaps to zero.
Don't forget step 4. You increase your future taxable capital gains by $100,000 on your replacement shares.

There may be benefits to delaying that taxation but it's not exactly a free lunch.
JustinR wrote:
Sun May 31, 2020 10:15 pm
Do you want to make an extra ~$1,000 a year for almost no effort?
You've forgotten that you've increased your future capital gains. Your net savings is the difference between your ordinary tax rate and the capital gains tax rate. Let's say 22% minus 15% is 7%. So your net savings on the $3,000 deduction is $210, not $1,000.

Better than a poke in the eye, but not a free lunch.
Your future tax rate can be 0%. So it very well can be a free lunch.

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l1am
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Re: Tax loss harvesting

Post by l1am » Sun Jun 07, 2020 2:46 pm

fyre4ce wrote:
Sun May 31, 2020 11:33 am
You're not missing the basic concept, but you are missing some ways that TLH can be advantageous:
  • By taking a deduction now of unlimited amount of capital gains, and $3,000 of other income, you're effectively receiving an interest-free loan from the government. This money can be invested and generate returns before you need to pay it back.
Agreed, I'll harvest to capture the $3k.
[*]Ordinary income and short-term capital gains are taxed at a higher rate than long-term gains, so if you deduct at a higher rate and pay later at a lower rate, there's an additional tax savings.

[*]If you take the deduction while living in a higher-tax state and later pay capital gains tax while living in a lower-tax state (common when talking about working years vs. retirement), there's an additional tax savings.

[*]Most people's marginal tax rate is lower in retirement than while working. If your tax rate is lower due to lower taxable income when you deduct vs. when you withdraw, there's an additional tax savings.

[*] Appreciated shares can be donated to charity, so you may never pay the capital gains tax.

[*]Appreciated shares receive a step-up in basis at death, so if you hold the shares until you die, you'll never pay the capital gains tax.
[/list]

Hope that helps.
These only seem to apply if I have realized capital gains. If I do have realized CG, I agree that I should capture CL to offset them.

However, none of these examples explain why I should actively sell to generate unrealized losses (beyond the $3k)?

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Re: Tax loss harvesting

Post by fyre4ce » Sun Jun 07, 2020 3:13 pm

l1am wrote:
Sun Jun 07, 2020 2:46 pm
fyre4ce wrote:
Sun May 31, 2020 11:33 am
You're not missing the basic concept, but you are missing some ways that TLH can be advantageous:
  • By taking a deduction now of unlimited amount of capital gains, and $3,000 of other income, you're effectively receiving an interest-free loan from the government. This money can be invested and generate returns before you need to pay it back.
Agreed, I'll harvest to capture the $3k.
[*]Ordinary income and short-term capital gains are taxed at a higher rate than long-term gains, so if you deduct at a higher rate and pay later at a lower rate, there's an additional tax savings.

[*]If you take the deduction while living in a higher-tax state and later pay capital gains tax while living in a lower-tax state (common when talking about working years vs. retirement), there's an additional tax savings.

[*]Most people's marginal tax rate is lower in retirement than while working. If your tax rate is lower due to lower taxable income when you deduct vs. when you withdraw, there's an additional tax savings.

[*] Appreciated shares can be donated to charity, so you may never pay the capital gains tax.

[*]Appreciated shares receive a step-up in basis at death, so if you hold the shares until you die, you'll never pay the capital gains tax.
[/list]

Hope that helps.
These only seem to apply if I have realized capital gains. If I do have realized CG, I agree that I should capture CL to offset them.

However, none of these examples explain why I should actively sell to generate unrealized losses (beyond the $3k)?
Keep in mind it's $3000/year, with unused losses carrying forward, so unless you only care about getting a tax deduction this year and never again, there's still an advantage in harvesting more than $3k of losses. It's really more than $3k, because harvesting large losses presumes that you have a large taxable account that's kicking off taxable income; the losses will "eat" any capital gains distribution in this tax drag each year. With a $100k taxable account and a 3% yield, you'll get an additional $3k of yield, some of which may be offset by the carryforward losses.

There are cases, especially with high-income/net worth investors, where diminishing returns kick in. If you're 50 years old and already have $250k (83 years worth) of carryforward losses, is it really worth harvesting another $150k of losses during the coronavirus crash? Maybe not. Carryover losses are effectively "wasted" if you die with them.

That said, the future is uncertain and there are a lot of unexpected scenarios where having those losses would help. You can use unlimited losses to offset other gains in future years, so if you decide to sell a lot of stock, sell a business, sell a house that's appreciated more than the $250k/500k exclusion, etc, they can come in handy.

Your last sentence doesn't make sense. Selling doesn't generate unrealized losses or gains. Market performance will dictate whether you have unrealized losses or gains, by comparing the market price to the price you paid. You can then choose to realize those losses or gains by selling. Tax loss harvesting is intentionally realizing losses to generate a tax deduction.

Edited to make capital gains offsetting more clear.
Last edited by fyre4ce on Sun Jun 07, 2020 9:16 pm, edited 1 time in total.

Topic Author
l1am
Posts: 337
Joined: Wed Mar 02, 2016 2:27 pm

Re: Tax loss harvesting

Post by l1am » Sun Jun 07, 2020 3:54 pm

fyre4ce wrote:
Sun Jun 07, 2020 3:13 pm
Keep in mind it's $3000/year, with unused losses carrying forward, so unless you only care about getting a tax deduction this year and never again, there's still an advantage in harvesting more than $3k of losses. It's really more than $3k, because harvesting large losses presumes that you have a large taxable account that's kicking off taxable income; the losses will "eat" this tax drag each year too. With a $100k taxable account and a 3% yield, you can use up losses at a rate of $6k/year.

There are cases, especially with high-income/net worth investors, where diminishing returns kick in. If you're 50 years old and already have $250k (83 years worth) of carryforward losses, is it really worth harvesting another $150k of losses during the coronavirus crash? Maybe not. Carryover losses are effectively "wasted" if you die with them.

That said, the future is uncertain and there are a lot of unexpected scenarios where having those losses would help. You can use unlimited losses to offset other gains in future years, so if you decide to sell a lot of stock, sell a business, sell a house that's appreciated more than the $250k/500k exclusion, etc, they can come in handy.

Your last sentence doesn't make sense. Selling doesn't generate unrealized losses or gains. Market performance will dictate whether you have unrealized losses or gains, by comparing the market price to the price you paid. You can then choose to realize those losses or gains by selling. Tax loss harvesting is intentionally realizing losses to generate a tax deduction.
Thank you, my last sentence was phrased wrong; I meant what's the advantage of making unrealized losses, realized. But the argument behind just generally building it and carrying over for years into the future makes sense. I think there's a limit on how many years it can carry, but that should also be FIFO.

Can you expand on your bolded sentence? Not sure I understand it.

fyre4ce
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Re: Tax loss harvesting

Post by fyre4ce » Sun Jun 07, 2020 5:32 pm

l1am wrote:
Sun Jun 07, 2020 3:54 pm
fyre4ce wrote:
Sun Jun 07, 2020 3:13 pm
Keep in mind it's $3000/year, with unused losses carrying forward, so unless you only care about getting a tax deduction this year and never again, there's still an advantage in harvesting more than $3k of losses. It's really more than $3k, because harvesting large losses presumes that you have a large taxable account that's kicking off taxable income; the losses will "eat" this tax drag each year too. With a $100k taxable account and a 3% yield, you can use up losses at a rate of $6k/year.

There are cases, especially with high-income/net worth investors, where diminishing returns kick in. If you're 50 years old and already have $250k (83 years worth) of carryforward losses, is it really worth harvesting another $150k of losses during the coronavirus crash? Maybe not. Carryover losses are effectively "wasted" if you die with them.

That said, the future is uncertain and there are a lot of unexpected scenarios where having those losses would help. You can use unlimited losses to offset other gains in future years, so if you decide to sell a lot of stock, sell a business, sell a house that's appreciated more than the $250k/500k exclusion, etc, they can come in handy.

Your last sentence doesn't make sense. Selling doesn't generate unrealized losses or gains. Market performance will dictate whether you have unrealized losses or gains, by comparing the market price to the price you paid. You can then choose to realize those losses or gains by selling. Tax loss harvesting is intentionally realizing losses to generate a tax deduction.
Thank you, my last sentence was phrased wrong; I meant what's the advantage of making unrealized losses, realized. But the argument behind just generally building it and carrying over for years into the future makes sense. I think there's a limit on how many years it can carry, but that should also be FIFO.

Can you expand on your bolded sentence? Not sure I understand it.
Yield is a term that refers to the amount of taxable income (interest, dividends, capital gains, etc.) that an investment generates. Certain investments, like a collectible painting, don't generate any yield - gains or losses come from price fluctuations only. Stocks generate yield through dividends, and trades inside of a mutual fund. 2% is a good rule of thumb for a diversified passive domestic stock mutual fund. The 30-day SEC yield on VTSAX is 1.88%. 3% is a bit more realistic for a portfolio that includes international stock funds and maybe some other investments. If you want a rough approximation for how much taxable income your taxable investments are generating (irrespective of any selling you do yourself), multiply the balance by 2 or 3 percent. Only the capital gains distribution portion of yield can be offset directly by capital losses, though.
Last edited by fyre4ce on Sun Jun 07, 2020 9:17 pm, edited 1 time in total.

Topic Author
l1am
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Re: Tax loss harvesting

Post by l1am » Sun Jun 07, 2020 6:22 pm

fyre4ce wrote:
Sun Jun 07, 2020 5:32 pm
Yield is a term that refers to the amount of taxable income (interest, dividends, capital gains, etc.) that an investment generates. Certain investments, like a collectible painting, don't generate any yield - gains or losses come from price fluctuations only. Stocks generate yield through dividends, and trades inside of a mutual fund. 2% is a good rule of thumb for a diversified passive domestic stock mutual fund. The 30-day SEC yield on VTSAX is 1.88%. 3% is a bit more realistic for a portfolio that includes international stock funds and maybe some other investments. If you want a rough approximation for how much taxable income your taxable investments are generating (irrespective of any selling you do yourself), multiply the balance by 2 or 3 percent.
Interest & dividends can only be offset up to $3k per year (via LT or ST CLs), correct?

CGs however are only generated through active selling, for which I can offset via accrued CLs?

lazynovice
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Re: Tax loss harvesting

Post by lazynovice » Sun Jun 07, 2020 7:23 pm

Some funds distribute capital gains at the end of the year. So you can have capital gains whether you sell or not. Index funds distribute very little in CG but you can occasionally see them.

fyre4ce
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Re: Tax loss harvesting

Post by fyre4ce » Sun Jun 07, 2020 9:11 pm

l1am wrote:
Sun Jun 07, 2020 6:22 pm
Interest & dividends can only be offset up to $3k per year (via LT or ST CLs), correct?
Correct. What I wrote was actually a bit misleading; sorry. Only capital gains (ST or LT) can be offset without limit by capital losses (carryforward or not). Interest and dividends can't be directly offset by capital losses and must be offset using the $3,000 of losses that can go toward ordinary income. I'll edit my previous post to make it clear.
l1am wrote:
Sun Jun 07, 2020 6:22 pm
CGs however are only generated through active selling, for which I can offset via accrued CLs?
Incorrect. If you own a mutual fund and the fund manager makes trades inside the fund, those capital gains get passed out to you on a 1099-DIV, and you have to pay taxes on them as if you sold the funds yourself. This is a big advantage of passive/index mutual funds when in a taxable account. Passive funds do occasionally make trades, but it's rare, only when stocks go on and off the index.

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l1am
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Re: Tax loss harvesting

Post by l1am » Sun Jun 07, 2020 10:17 pm

fyre4ce wrote:
Sun Jun 07, 2020 9:11 pm
l1am wrote:
Sun Jun 07, 2020 6:22 pm
CGs however are only generated through active selling, for which I can offset via accrued CLs?
Incorrect. If you own a mutual fund and the fund manager makes trades inside the fund, those capital gains get passed out to you on a 1099-DIV, and you have to pay taxes on them as if you sold the funds yourself. This is a big advantage of passive/index mutual funds when in a taxable account. Passive funds do occasionally make trades, but it's rare, only when stocks go on and off the index.
Wow, I never knew that! I guess it's this line on the 1099-DIV:

2a Total capital gain distr....................................................... 0.00

----

I have three primary taxable funds: VTSAX, VTIAX and VWIUX.

Does it sound reasonable to switch auto-reinvestments for VTSAX and VTIAX and direct to VWIUX. Then I can TLH from the stock funds.

Seems like the simplest option for me. Just means I can't TLH from the bond fund, but movement there is much more minimal.

AlohaJoe
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Re: Tax loss harvesting

Post by AlohaJoe » Sun Jun 07, 2020 11:09 pm

the way wrote:
Sun May 31, 2020 10:39 pm
The one problem with capital loss carryovers is that you can't choose not to use it each year. I was carrying a large loss for a couple of years during very low income and it was a total waste (particularly painful if you are in the 0% LTCG bracket).
If you're in a situation like that you should be using the capital losses to offset additional tax gain harvesting.

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Re: Tax loss harvesting

Post by fyre4ce » Sun Jun 07, 2020 11:35 pm

l1am wrote:
Sun Jun 07, 2020 10:17 pm
I have three primary taxable funds: VTSAX, VTIAX and VWIUX.

Does it sound reasonable to switch auto-reinvestments for VTSAX and VTIAX and direct to VWIUX. Then I can TLH from the stock funds.

Seems like the simplest option for me. Just means I can't TLH from the bond fund, but movement there is much more minimal.
I'm not sure I follow your logic on why you'd change auto-reinvestments to the bond fund. Is it to avoid the possibility of a wash sale on reinvested dividends?

Topic Author
l1am
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Re: Tax loss harvesting

Post by l1am » Mon Jun 08, 2020 12:19 am

fyre4ce wrote:
Sun Jun 07, 2020 11:35 pm
l1am wrote:
Sun Jun 07, 2020 10:17 pm
I have three primary taxable funds: VTSAX, VTIAX and VWIUX.

Does it sound reasonable to switch auto-reinvestments for VTSAX and VTIAX and direct to VWIUX. Then I can TLH from the stock funds.

Seems like the simplest option for me. Just means I can't TLH from the bond fund, but movement there is much more minimal.
I'm not sure I follow your logic on why you'd change auto-reinvestments to the bond fund. Is it to avoid the possibility of a wash sale on reinvested dividends?
Yes, I have auto reinvestment set up so I’ll need to turn it off to avoid wash sales.

fyre4ce
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Re: Tax loss harvesting

Post by fyre4ce » Fri Jun 12, 2020 5:27 pm

l1am wrote:
Mon Jun 08, 2020 12:19 am
fyre4ce wrote:
Sun Jun 07, 2020 11:35 pm
l1am wrote:
Sun Jun 07, 2020 10:17 pm
I have three primary taxable funds: VTSAX, VTIAX and VWIUX.

Does it sound reasonable to switch auto-reinvestments for VTSAX and VTIAX and direct to VWIUX. Then I can TLH from the stock funds.

Seems like the simplest option for me. Just means I can't TLH from the bond fund, but movement there is much more minimal.
I'm not sure I follow your logic on why you'd change auto-reinvestments to the bond fund. Is it to avoid the possibility of a wash sale on reinvested dividends?
Yes, I have auto reinvestment set up so I’ll need to turn it off to avoid wash sales.
I had an issue with a wash sale a couple years ago. I sold a fund that had auto reinvested dividends within the prior 30 days, and my brokerage said I had a disallowed loss of $1.XX. After further reading (link) I don't think this was an actual wash sale, because it wasn't a purchase of replacement shares. Maybe someone more experienced than me can advise on how to handle this - maybe just ignoring the 1099 and entering the entire sale as a capital loss?

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