I don’t understand why tax loss harvesting is that beneficial

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I-Know-Nothing
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I don’t understand why tax loss harvesting is that beneficial

Post by I-Know-Nothing »

I still have a lot to learn, but there must be something I’m missing in my understanding of tax loss harvesting. It seems like it would have a small benefit, but not significant, because you are limited to $3,000 per year. The way I understand it, if a person had $200k invested in VTSAX, and the market had a horrible crash where VTSAX lost 45% of its value, the person could sell could sell the VTSAX at a loss of $90k and invest the remaining $110k in VTIAX. Now that person’s new cost basis is $110k. They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains. And that will be helpful, because they will probably have significant capital gains in this case, as their cost basis is now much lower and the market just crashed. This sounds good, but is $3k a year enough to really alter the picture that much for most investors?
sport
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by sport »

I-Know-Nothing wrote: Sun Apr 25, 2021 10:49 am They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains.
That is not how it works. They can use the loss to offset capital gains without limit up to the 90k. In addition, they can offset 3k of ordinary income each year if there is any loss remaining after offsetting gains. Since ordinary income is taxed at a higher rate than CG, that is part of the benefit.
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retired@50
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by retired@50 »

You can also use the theoretical $90k in capital losses to offset capital gains in future years, so it probably wouldn't take 30 years to "use" those capital losses.
The value of these annual $3k offsets to income are more valuable for high tax bracket investors.

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ruud
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by ruud »

Carryover losses can offset any amount of gains, not limited to $3,000. Only if you have no gains, do they offset $3,000 of ordinary income.
.
GoldenFinch
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by GoldenFinch »

You get the 3,000 per year, which isn’t a lot, but it’s something. We have quite a bit of tax losses and we have used them to offset capital gains when we sold funds in our taxable account. So that was a benefit.
Last edited by GoldenFinch on Sun Apr 25, 2021 11:14 am, edited 1 time in total.
dukeblue219
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by dukeblue219 »

It is especially useful if you need to rebalance taxable investments or change them outright. I cleaned up my taxable portfolio substantially in March of 20 by dumping a few individual stocks and ETFs that no longer had big gains and then buying more VOO.
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anon_investor
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by anon_investor »

I-Know-Nothing wrote: Sun Apr 25, 2021 10:49 am I still have a lot to learn, but there must be something I’m missing in my understanding of tax loss harvesting. It seems like it would have a small benefit, but not significant, because you are limited to $3,000 per year. The way I understand it, if a person had $200k invested in VTSAX, and the market had a horrible crash where VTSAX lost 45% of its value, the person could sell could sell the VTSAX at a loss of $90k and invest the remaining $110k in VTIAX. Now that person’s new cost basis is $110k. They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains. And that will be helpful, because they will probably have significant capital gains in this case, as their cost basis is now much lower and the market just crashed. This sounds good, but is $3k a year enough to really alter the picture that much for most investors?
For someone in a high tax bracket and state income tax, that $3k a year offset on ordinary income could be worth $1.2K/yr plus on tax savings. They may also be subject to 23.8% Fed cap gains plus state income tax today, but in retirement may be subject to a much lower rate. They may also never sell all their investments and leave it to their children, where it receives a step up in basis and capital gains are this never paid.
sport
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by sport »

ruud wrote: Sun Apr 25, 2021 10:55 am Carryover losses can offset any amount of gains, not limited to $3,000. Only if you have no gains, do they offset $3,000 of ordinary income.
No, after you offset any gains, you get to offset 3K of ordinary income *in addition to* the cap gains as long as you are within the amount of losses. Whatever is left over after than carries over to future years.
Last edited by sport on Sun Apr 25, 2021 11:04 am, edited 1 time in total.
Topic Author
I-Know-Nothing
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by I-Know-Nothing »

sport wrote: Sun Apr 25, 2021 10:53 am
I-Know-Nothing wrote: Sun Apr 25, 2021 10:49 am They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains.
That is not how it works. They can use the loss to offset capital gains without limit up to the 90k. In addition, they can offset 3k of ordinary income each year if there is any loss remaining after offsetting gains. Since ordinary income is taxed at a higher rate than CG, that is part of the benefit.
Sorry, yes, I know that the loss could be used in the same year to offset any capital gains. I should have made that clear in my post. But it seems when I see people posting about tax loss harvesting, they don’t really think that is the beneficial part - it’s the $3k a year that you can carry forward. I understand about using that $3k to offset ordinary income, but for someone in the 22% or 24% tax bracket, is that a huge benefit? The difference between the LTCG rate and the 24% tax bracket is 9%. 9% of $3,000 is $270. A nice little chunk of money, but not an amount that will really change things for most. Even if someone was in the 37% tax bracket, the difference between 37% and 15% is 22%. 22% of $3k is $660. Certainly better than nothing, but I see people posting about TLH a disproportionate amount compared to a $660 max benefit per year.
Shallowpockets
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by Shallowpockets »

There is a perceived benefit to tax loss harvesting. In reality, you lost. No one goes into an investment with the intention of losing. It is a try to make the best of it sort of thing.
ruud
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by ruud »

sport wrote: Sun Apr 25, 2021 11:03 am
ruud wrote: Sun Apr 25, 2021 10:55 am Carryover losses can offset any amount of gains, not limited to $3,000. Only if you have no gains, do they offset $3,000 of ordinary income.
No, after you offset any gains, you get to offset 3K of ordinary income *in addition to* the cap gains as long as you are within the amount of losses. Whatever is left over after than carries over to future years.
Of course. Thanks for the correction. (I should have my coffee before posting in the morning)
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Topic Author
I-Know-Nothing
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by I-Know-Nothing »

dukeblue219 wrote: Sun Apr 25, 2021 10:58 am It is especially useful if you need to rebalance taxable investments or change them outright. I cleaned up my taxable portfolio substantially in March of 20 by dumping a few individual stocks and ETFs that no longer had big gains and then buying more VOO.
This makes sense, but now your cost basis for VOO is lower, than it was for the other investments you sold at a loss, right? So when you sell you will theoretically have to pay capital gains on additional growth, right? Or is the idea that you won’t sell until you retire and in retirement you won’t have to pay capital gains because your income will be lower? Or that you will pass the assets along to kids who will get a stepped up basis? Just trying to wrap my head around all this.
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I-Know-Nothing
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by I-Know-Nothing »

anon_investor wrote: Sun Apr 25, 2021 10:58 am
I-Know-Nothing wrote: Sun Apr 25, 2021 10:49 am I still have a lot to learn, but there must be something I’m missing in my understanding of tax loss harvesting. It seems like it would have a small benefit, but not significant, because you are limited to $3,000 per year. The way I understand it, if a person had $200k invested in VTSAX, and the market had a horrible crash where VTSAX lost 45% of its value, the person could sell could sell the VTSAX at a loss of $90k and invest the remaining $110k in VTIAX. Now that person’s new cost basis is $110k. They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains. And that will be helpful, because they will probably have significant capital gains in this case, as their cost basis is now much lower and the market just crashed. This sounds good, but is $3k a year enough to really alter the picture that much for most investors?
For someone in a high tax bracket and state income tax, that $3k a year offset on ordinary income could be worth $1.2K/yr plus on tax savings. They may also be subject to 23.8% Fed cap gains plus state income tax today, but in retirement may be subject to a much lower rate. They may also never sell all their investments and leave it to their children, where it receives a step up in basis and capital gains are this never paid.
Ok, this part makes a lot of sense to me. Thank you.
dafioram
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by dafioram »

I-Know-Nothing wrote: Sun Apr 25, 2021 11:22 am
dukeblue219 wrote: Sun Apr 25, 2021 10:58 am It is especially useful if you need to rebalance taxable investments or change them outright. I cleaned up my taxable portfolio substantially in March of 20 by dumping a few individual stocks and ETFs that no longer had big gains and then buying more VOO.
This makes sense, but now your cost basis for VOO is lower, than it was for the other investments you sold at a loss, right? So when you sell you will theoretically have to pay capital gains on additional growth, right? Or is the idea that you won’t sell until you retire and in retirement you won’t have to pay capital gains because your income will be lower? Or that you will pass the assets along to kids who will get a stepped up basis? Just trying to wrap my head around all this.
Exactly. Take the deduction now and pay the tax later, maybe. Or donate the high gain etfs. Having a large loss carryover is very beneficial when you must sell a larger investment like real estate or a business since you can offset those gains.
trees
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by trees »

I’m in the accumulation phase - I don’t plan on selling my investments any time soon, so benefit now (and in high tax bracket) has significant worth over taxes decades in the future, just like 401k / IRA contributions. In addition to the 3k offset of earned income (worth over 1k), it also offsets capital gains that are spun out of the mutual funds I own as part of their normal distributions, or differences between the short period of rsu vesting and selling. That offset something ~5k of capital gains last year. Note: I also use highly appreciated funds for my donations to charity, so some of the funds where I’ve done loss harvesting will never have their eventual gains taxed.
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goingup
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by goingup »

I think TLH should be done judiciously or else you'll have a bunch of little harvests and a proliferation of TLH partner funds. That said, it's a useful tax tool, especially for high earners and investors with large taxable accounts. We've done or will do the following:

*Used $3K loss against highest income bracket, saving $1K per year.
*Used losses to offset capital gains when selling appreciated stock/bond funds
*Used losses to offset capital gains distributions which happen occasionally with stock/bond funds we own
*Will use large carry-over losses to offset capital gains when selling our highly appreciated home

Unused losses carry forward indefinitely. Last time I did it was March 2020 to swap international funds and harvest $25K loss.

I do think many people make too big a deal out of it and use it as an excuse to tinker. When you find yourself turning off automatic investing because you hope to harvest a loss, you've lost sight of the big picture. Big things are to save and invest. No one ever got wealthy by just saving some money on taxes. :wink:
KlangFool
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by KlangFool »

I-Know-Nothing wrote: Sun Apr 25, 2021 11:04 am
sport wrote: Sun Apr 25, 2021 10:53 am
I-Know-Nothing wrote: Sun Apr 25, 2021 10:49 am They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains.
That is not how it works. They can use the loss to offset capital gains without limit up to the 90k. In addition, they can offset 3k of ordinary income each year if there is any loss remaining after offsetting gains. Since ordinary income is taxed at a higher rate than CG, that is part of the benefit.
Sorry, yes, I know that the loss could be used in the same year to offset any capital gains. I should have made that clear in my post. But it seems when I see people posting about tax loss harvesting, they don’t really think that is the beneficial part - it’s the $3k a year that you can carry forward. I understand about using that $3k to offset ordinary income, but for someone in the 22% or 24% tax bracket, is that a huge benefit? The difference between the LTCG rate and the 24% tax bracket is 9%. 9% of $3,000 is $270. A nice little chunk of money, but not an amount that will really change things for most. Even if someone was in the 37% tax bracket, the difference between 37% and 15% is 22%. 22% of $3k is $660. Certainly better than nothing, but I see people posting about TLH a disproportionate amount compared to a $660 max benefit per year.
I-Know-Nothing,

1) Why it has to be LTCG of 15%? It does not have to be. It could be 0%. Hence, it is the difference between of 24% and 0%.

2) There is another version of this. Tax Gain Harvest (TGH). Essentially, you harvest your gain at 0% LTCG. Then, you could TLH at a higher cost basis.

3) It could be time shifted. Aka, TLH at 24% now. And, TGH at 0% when early retire.

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StevieG72
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by StevieG72 »

I don’t see the logic in taking the loss. I have done it once to sell some international and immediately buy a similar fund, but I was looking to simplify my international holdings anyways.

The logic escapes me to sell a total stock market fund and book a huge loss.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by jebmke »

StevieG72 wrote: Sun Apr 25, 2021 11:53 am I don’t see the logic in taking the loss. I have done it once to sell some international and immediately buy a similar fund, but I was looking to simplify my international holdings anyways.

The logic escapes me to sell a total stock market fund and book a huge loss.
Everyone has different circumstances, I guess. I booked huge losses in '08-09 and used much of them in subsequent years to re-balance out of equity as I blew past my re-balance point. Along the way I was able to use $3K per year to offset other income.
When you discover that you are riding a dead horse, the best strategy is to dismount.
MindBogler
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by MindBogler »

StevieG72 wrote: Sun Apr 25, 2021 11:53 am I don’t see the logic in taking the loss. I have done it once to sell some international and immediately buy a similar fund, but I was looking to simplify my international holdings anyways.

The logic escapes me to sell a total stock market fund and book a huge loss.
If you pair VTI and VOO, for example, their performance is very similar. Selling at a loss in VTI and buying VOO is practically the same as not selling at all, except now your "loss" can be used to offset future gains and/or as a $3000 deduction against ordinary income.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by Ron Ronnerson »

I’ll add a couple more scenarios where the $3k capital loss has the potential to be quite advantageous. For example, take a situation where someone goes over the ACA subsidy cliff by $3k. Or let’s assume it is the year 2021 and your family (with lots of kids) has an AGI of $153k. You’re in the phaseouts for the stimulus checks and for the enhanced child tax credits. $3k can sometimes be way more than $3k seems.
stan1
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by stan1 »

I think the one of the main benefits of tax loss harvesting is psychological and behavioral. It's something actionable you can focus on during a market drop that adds a small amount of value and helps stay the course. Those who focused on tax loss harvesting in March 2020 while maintaining asset allocation surely came out ahead, mostly because they maintained asset allocation.
txhill
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by txhill »

Tax loss harvesting is like taking Advil after you get punched in the face. You’d rather not get punched in the first place, but if you do, you might as well make the best of it.
gopack13
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by gopack13 »

KlangFool wrote: Sun Apr 25, 2021 11:45 am
I-Know-Nothing wrote: Sun Apr 25, 2021 11:04 am
sport wrote: Sun Apr 25, 2021 10:53 am
I-Know-Nothing wrote: Sun Apr 25, 2021 10:49 am They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains.
That is not how it works. They can use the loss to offset capital gains without limit up to the 90k. In addition, they can offset 3k of ordinary income each year if there is any loss remaining after offsetting gains. Since ordinary income is taxed at a higher rate than CG, that is part of the benefit.
Sorry, yes, I know that the loss could be used in the same year to offset any capital gains. I should have made that clear in my post. But it seems when I see people posting about tax loss harvesting, they don’t really think that is the beneficial part - it’s the $3k a year that you can carry forward. I understand about using that $3k to offset ordinary income, but for someone in the 22% or 24% tax bracket, is that a huge benefit? The difference between the LTCG rate and the 24% tax bracket is 9%. 9% of $3,000 is $270. A nice little chunk of money, but not an amount that will really change things for most. Even if someone was in the 37% tax bracket, the difference between 37% and 15% is 22%. 22% of $3k is $660. Certainly better than nothing, but I see people posting about TLH a disproportionate amount compared to a $660 max benefit per year.
I-Know-Nothing,

1) Why it has to be LTCG of 15%? It does not have to be. It could be 0%. Hence, it is the difference between of 24% and 0%.

2) There is another version of this. Tax Gain Harvest (TGH). Essentially, you harvest your gain at 0% LTCG. Then, you could TLH at a higher cost basis.

3) It could be time shifted. Aka, TLH at 24% now. And, TGH at 0% when early retire.

KlangFool
This.

I took ~$2k loss at the end of 2018 by swapping some VTSAX to VFIAX. In addition to the immediate savings of offsetting income, I was also in the phase out range for deducting tIRA contributions. Lowering my income by $2k allowed me to contribute $1,200 more to my tIRA which also saved me some taxes. Total savings of around $700.

Using the idea KlangFool is referring to, when I stop working I'll be able to convert that tIRA money to Roth AND realize those capital gains without paying a dime in taxes.
Shalom Aleichem
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by Shalom Aleichem »

I-Know-Nothing wrote: Sun Apr 25, 2021 10:49 am I still have a lot to learn, but there must be something I’m missing in my understanding of tax loss harvesting. It seems like it would have a small benefit, but not significant, because you are limited to $3,000 per year. The way I understand it, if a person had $200k invested in VTSAX, and the market had a horrible crash where VTSAX lost 45% of its value, the person could sell could sell the VTSAX at a loss of $90k and invest the remaining $110k in VTIAX. Now that person’s new cost basis is $110k. They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains. And that will be helpful, because they will probably have significant capital gains in this case, as their cost basis is now much lower and the market just crashed. This sounds good, but is $3k a year enough to really alter the picture that much for most investors?
Hi. That's largely correct. You sell assets as a loss, immediately book something very similar (say SP500 for TSM), and register the loss. That loss then can offset up to $3000 per year in taxes as well as any capital gains you can offset. This comes of course at the cost of having a lower cost basis. So the advantage (I'd probably put that in quotes) if you are not registering capital gains is $3K off your tax bill per year, but when you sell the assets you will pay more in capital gains, all things being equal. So you are betting capital gains will not be higher in the future as compared to now. If CG will be higher you did yourself a disservice. The caveat to that would be if you plan on donating the assets to charity, you get the registered loss but the full deduction when you give to charity. So if you are planning to give the assets to charity it is a no brainer.

I'm with you. Everyone here talks about doing it but it seems to me the benefit is modest and depending on if CG taxes go up or down it may be to your detriment. For me I don't see the country is going in a direction where CG taxes are going down. It seems to me we are going in a place where people who defer gratification, and work hard now to generate future benefits are looked at jealously by those who did not, and politicians that are elected seem eager to "stick it to the rich." It seems to me like class warfare is getting to be a thing again. So I'm not sure if TLH will be a good idea or not.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by Shalom Aleichem »

MindBogler wrote: Sun Apr 25, 2021 11:58 am
StevieG72 wrote: Sun Apr 25, 2021 11:53 am I don’t see the logic in taking the loss. I have done it once to sell some international and immediately buy a similar fund, but I was looking to simplify my international holdings anyways.

The logic escapes me to sell a total stock market fund and book a huge loss.
If you pair VTI and VOO, for example, their performance is very similar. Selling at a loss in VTI and buying VOO is practically the same as not selling at all, except now your "loss" can be used to offset future gains and/or as a $3000 deduction against ordinary income.
True but your cost basis is now greater and you will pay CG taxes on the greater CG. I think it really depends if CG taxes go up or not. If they go up it's a bad idea. If not it's a not unreasonable idea but not like such a great benefit. Looking at the way the country is going, everyone seems to want to "stick it to the rich" and so I don't think CG taxes are going down. If they are changing it is up.
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grogu
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by grogu »

My Fidelity account tells me that I own $X of a fund, and I have a cost basis of $Y. The vast majority of my holdings in this (and pretty much all of my funds) have been held for a long time, are up a ton, and hopefully have passed the point where they’re ever going to turn into a loss. At least in the aggregate. But over the years I’ve also made periodic smaller additions. Certainly it’s possible that some of my more recent purchases could turn into $3k in losses if the market declined and I wanted to harvest.

So assuming I could identify enough recently purchased shares that are at a loss (is there an easy way?), and that these “losing shares” represent only a small fraction of my total holdings in the fund (which still has an overall net gain), can I instruct Fidelity to sell only the shares that have lost? Is there some pro rata or first-in-first-out rule that would prevent me from ever harvesting a potential loss if my entire holding in a fund is still a net gain?
H-Town
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by H-Town »

I-Know-Nothing wrote: Sun Apr 25, 2021 11:04 am
sport wrote: Sun Apr 25, 2021 10:53 am
I-Know-Nothing wrote: Sun Apr 25, 2021 10:49 am They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains.
That is not how it works. They can use the loss to offset capital gains without limit up to the 90k. In addition, they can offset 3k of ordinary income each year if there is any loss remaining after offsetting gains. Since ordinary income is taxed at a higher rate than CG, that is part of the benefit.
Sorry, yes, I know that the loss could be used in the same year to offset any capital gains. I should have made that clear in my post. But it seems when I see people posting about tax loss harvesting, they don’t really think that is the beneficial part - it’s the $3k a year that you can carry forward. I understand about using that $3k to offset ordinary income, but for someone in the 22% or 24% tax bracket, is that a huge benefit? The difference between the LTCG rate and the 24% tax bracket is 9%. 9% of $3,000 is $270. A nice little chunk of money, but not an amount that will really change things for most. Even if someone was in the 37% tax bracket, the difference between 37% and 15% is 22%. 22% of $3k is $660. Certainly better than nothing, but I see people posting about TLH a disproportionate amount compared to a $660 max benefit per year.
Think about it as a "interest-free" loan from the IRS. You defer the capital gain to the future while taking $3k ordinary deduction currently. You also have a chance to write off the loan for free as well if you plan out your capital gain harvesting during your early retirement.

Same with Roth conversion, you convert the traditional tax deferred savings into Roth accounts during your early retirement years. Essentially you're making those tax deferred contributions tax-free.

Sure you can turn it down. It's free money so Imma take it though.
Time is the ultimate currency.
MrJedi
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by MrJedi »

I TLH and get a tax deduction. When my reduced basis shares become highly appreciated, I gift them to charity/DAF and avoid paying tax on the growth. When I gift them, I use the cash I would have donated otherwise to replace the gifted shares but now they're at a higher basis. With the higher basis, there comes more opportunity to TLH and get a deduction and lower the basis again. Then eventually appreciate and get gifted out again, etc.

I gift money regularly so this makes my gifts much more tax efficient.
KlangFool
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by KlangFool »

grogu wrote: Sun Apr 25, 2021 12:56 pm My Fidelity account tells me that I own $X of a fund, and I have a cost basis of $Y. The vast majority of my holdings in this (and pretty much all of my funds) have been held for a long time, are up a ton, and hopefully have passed the point where they’re ever going to turn into a loss. At least in the aggregate. But over the years I’ve also made periodic smaller additions. Certainly it’s possible that some of my more recent purchases could turn into $3k in losses if the market declined and I wanted to harvest.

So assuming I could identify enough recently purchased shares that are at a loss (is there an easy way?), and that these “losing shares” represent only a small fraction of my total holdings in the fund (which still has an overall net gain), can I instruct Fidelity to sell only the shares that have lost? Is there some pro rata or first-in-first-out rule that would prevent me from ever harvesting a potential loss if my entire holding in a fund is still a net gain?
grogu,

Depending on your current marginal tax rate, you could tax gain harvest some of those gain at 0% now.

<<So assuming I could identify enough recently purchased shares that are at a loss (is there an easy way?), and that these “losing shares” represent only a small fraction of my total holdings in the fund (which still has an overall net gain), can I instruct Fidelity to sell only the shares that have lost? >>

You could do that if you set the cost basis of the share as Specific ID. Then, you could sell specific share. If you want to TLH and TGH, you should do that.

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donall
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by donall »

Tax loss harvesting is good for adjusting your income if you are on the edge of receiving tax benefits such as Child credit, Corona virus relief payments and paying for IRMMA.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by sperry8 »

I-Know-Nothing wrote: Sun Apr 25, 2021 11:04 am
sport wrote: Sun Apr 25, 2021 10:53 am
I-Know-Nothing wrote: Sun Apr 25, 2021 10:49 am They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains.
That is not how it works. They can use the loss to offset capital gains without limit up to the 90k. In addition, they can offset 3k of ordinary income each year if there is any loss remaining after offsetting gains. Since ordinary income is taxed at a higher rate than CG, that is part of the benefit.
Sorry, yes, I know that the loss could be used in the same year to offset any capital gains. I should have made that clear in my post. But it seems when I see people posting about tax loss harvesting, they don’t really think that is the beneficial part - it’s the $3k a year that you can carry forward. I understand about using that $3k to offset ordinary income, but for someone in the 22% or 24% tax bracket, is that a huge benefit? The difference between the LTCG rate and the 24% tax bracket is 9%. 9% of $3,000 is $270. A nice little chunk of money, but not an amount that will really change things for most. Even if someone was in the 37% tax bracket, the difference between 37% and 15% is 22%. 22% of $3k is $660. Certainly better than nothing, but I see people posting about TLH a disproportionate amount compared to a $660 max benefit per year.
If people think the primary beneficial part is what I bolded above, they misunderstand the primary benefit. The beneficial part is the write-off all all your capital gains, carried forward, until you use them up. Last year, I used up all my harvested tax losses from the Great Recession in 08/09. This year, I started paying taxes without those corresponding carry forward losses. And let me tell you - my tax payment this year was a shock. Those harvested tax losses saved me oodles of taxes for a dozen years. Of course, I'll likely never see losses again as my cost basis is now at the depths of the lows during 08/09. But it allowed for quite the tax savings over the years.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by jebmke »

sperry8 wrote: Sun Apr 25, 2021 1:41 pm The beneficial part is the write-off all all your capital gains, carried forward, until you use them up. Last year, I used up all my harvested tax losses from the Great Recession in 08/09. This year, I started paying taxes without those corresponding carry forward losses.
Same here. In my case, it just so happens that the losses ran out about the same time I had scheduled to change my IPS. I kept a fairly low equity allocation for the first 10 years of retirement until starting my pension. Once I started my pension, I changed my allocation plan such that I will not re-balance on the upside. I was able to re-balance tax free for 10 years when I needed it (plus the $3K write off) and now I can avoid taking any gains going forward.

For many people, there is zero cost associated for loss harvesting so there is no downside, only potential upside.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by I-Know-Nothing »

KlangFool wrote: Sun Apr 25, 2021 11:45 am
I-Know-Nothing wrote: Sun Apr 25, 2021 11:04 am
sport wrote: Sun Apr 25, 2021 10:53 am

Sorry, yes, I know that the loss could be used in the same year to offset any capital gains. I should have made that clear in my post. But it seems when I see people posting about tax loss harvesting, they don’t really think that is the beneficial part - it’s the $3k a year that you can carry forward. I understand about using that $3k to offset ordinary income, but for someone in the 22% or 24% tax bracket, is that a huge benefit? The difference between the LTCG rate and the 24% tax bracket is 9%. 9% of $3,000 is $270. A nice little chunk of money, but not an amount that will really change things for most. Even if someone was in the 37% tax bracket, the difference between 37% and 15% is 22%. 22% of $3k is $660. Certainly better than nothing, but I see people posting about TLH a disproportionate amount compared to a $660 max benefit per year.
I-Know-Nothing,

1) Why it has to be LTCG of 15%? It does not have to be. It could be 0%. Hence, it is the difference between of 24% and 0%.

2) There is another version of this. Tax Gain Harvest (TGH). Essentially, you harvest your gain at 0% LTCG. Then, you could TLH at a higher cost basis.

3) It could be time shifted. Aka, TLH at 24% now. And, TGH at 0% when early retire.

KlangFool
Ok, so it would function kind of like a 401k. I understand, thank you. It would work well if one can keep their expenses low in retirement, and if the tax laws don’t change in a way that doesn’t tax capital gains as favorably.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by I-Know-Nothing »

donall wrote: Sun Apr 25, 2021 1:30 pm Tax loss harvesting is good for adjusting your income if you are on the edge of receiving tax benefits such as Child credit, Corona virus relief payments and paying for IRMMA.
Yeah, true. It would be great if someone was on the edge of one of these cliffs. I might be on the edge of one of these myself. Maybe I should hope for a $3k loss to harvest. Just kidding...mostly.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by I-Know-Nothing »

txhill wrote: Sun Apr 25, 2021 12:03 pm Tax loss harvesting is like taking Advil after you get punched in the face. You’d rather not get punched in the first place, but if you do, you might as well make the best of it.
Haha, great analogy!
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by I-Know-Nothing »

jebmke wrote: Sun Apr 25, 2021 1:48 pm
sperry8 wrote: Sun Apr 25, 2021 1:41 pm The beneficial part is the write-off all all your capital gains, carried forward, until you use them up. Last year, I used up all my harvested tax losses from the Great Recession in 08/09. This year, I started paying taxes without those corresponding carry forward losses.
Same here. In my case, it just so happens that the losses ran out about the same time I had scheduled to change my IPS. I kept a fairly low equity allocation for the first 10 years of retirement until starting my pension. Once I started my pension, I changed my allocation plan such that I will not re-balance on the upside. I was able to re-balance tax free for 10 years when I needed it (plus the $3K write off) and now I can avoid taking any gains going forward.

For many people, there is zero cost associated for loss harvesting so there is no downside, only potential upside.
I definitely see what you are saying, but there is a potential downside, isn’t there? I know we can’t speculate on future laws, but tax laws do change. What if they change in a way that makes capital gains not taxed as favorably? If capital gains were taxed as ordinary income, and income taxes rise, wouldn’t it have been better to not tax loss harvest? You may not think there is much risk of such a change, and I wouldn’t disagree, but there is always a risk.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by jebmke »

I-Know-Nothing wrote: Sun Apr 25, 2021 2:28 pm I definitely see what you are saying, but there is a potential downside, isn’t there? I know we can’t speculate on future laws, but tax laws do change. What if they change in a way that makes capital gains not taxed as favorably? If capital gains were taxed as ordinary income, and income taxes rise, wouldn’t it have been better to not tax loss harvest? You may not think there is much risk of such a change, and I wouldn’t disagree, but there is always a risk.
I don't consider any possibility of tax changes - not a useful exercise. But, as I said, "for many people," not all. Keep in mind that the losses carry forward (except for the $3K) so it isn't like they are lost. If rates on CG go up, those losses will cover much of the gain. The only leakage is the $3K. In my case, I will never sell equity so there is no risk.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by grabiner »

I-Know-Nothing wrote: Sun Apr 25, 2021 2:28 pm I definitely see what you are saying, but there is a potential downside, isn’t there? I know we can’t speculate on future laws, but tax laws do change. What if they change in a way that makes capital gains not taxed as favorably? If capital gains were taxed as ordinary income, and income taxes rise, wouldn’t it have been better to not tax loss harvest? You may not think there is much risk of such a change, and I wouldn’t disagree, but there is always a risk.
This doesn't even require a change in laws, just a change in your tax situation. Suppose that you currently live in a no-tax state (or a state which doesn't allow capital losses to be deducted) and pay 22% tax on ordinary income. You then move to a high-tax state where you pay 15% tax on long-term gains and 9% state tax, and it might become even worse if your income also rises and you pay 3.8% NIIT for a tax rate of 27.8%.

But it's likely still a net benefit. Suppose that you take a $3000 capital loss against your ordinary income this year and save $660. In a later year, you have a $3000 capital gain taxed at 27.8% and pay $834. It doesn't take that long for an investment of $660 to grow to more than $834.

In addition, you might never pay tax on the shares you buy after the harvest. You might donate them to charity, or leave them to your heirs, or sell them in retirement when you have a 0% tax rate on capital gains.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by sperry8 »

grabiner wrote: Sun Apr 25, 2021 2:43 pm
I-Know-Nothing wrote: Sun Apr 25, 2021 2:28 pm I definitely see what you are saying, but there is a potential downside, isn’t there? I know we can’t speculate on future laws, but tax laws do change. What if they change in a way that makes capital gains not taxed as favorably? If capital gains were taxed as ordinary income, and income taxes rise, wouldn’t it have been better to not tax loss harvest? You may not think there is much risk of such a change, and I wouldn’t disagree, but there is always a risk.
This doesn't even require a change in laws, just a change in your tax situation. Suppose that you currently live in a no-tax state (or a state which doesn't allow capital losses to be deducted) and pay 22% tax on ordinary income. You then move to a high-tax state where you pay 15% tax on long-term gains and 9% state tax, and it might become even worse if your income also rises and you pay 3.8% NIIT for a tax rate of 27.8%.

But it's likely still a net benefit. Suppose that you take a $3000 capital loss against your ordinary income this year and save $660. In a later year, you have a $3000 capital gain taxed at 27.8% and pay $834. It doesn't take that long for an investment of $660 to grow to more than $834.

In addition, you might never pay tax on the shares you buy after the harvest. You might donate them to charity, or leave them to your heirs, or sell them in retirement when you have a 0% tax rate on capital gains.
What I bolded above is quite correct for me. Over the decade+ that I didn't pay CG taxes (due to tax loss harvesting) that money was invested in the market (rather than paid in taxes). A 10 year bull market. This money grew, compounded, over time. I-Know-Nothing, instead you would suggest I should not tax loss harvest due to speculation on future CG tax rates? No thanks. I'll take the compound growth of not paying taxes today in a rising market and let the chips fall where they may in later years. I'm hard pressed to think of a future scenario that would've made the decision I already made a poor one.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by willthrill81 »

In many situations, TLHing is basically tax deferment (and may result in no taxes at all down the road). It doesn't get much attention around here, but tax gain harvesting can be beneficial in the right circumstances as well.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by BolderBoy »

As a rule of thumb, you should harvest losses in your taxable investing account whenever you have the opportunity. Others have covered many of the benefits to doing so. Still others have alluded to some specific taxable income offset advantages to doing so without being very specific, so I'll add some educational value to the mix.

AGI, adjusted gross income, is the focal point of much tax legislation. AGI can be thought of as a line where things happen above and below that line. Things that happen below that line, such as itemized deductions, do not change or otherwise affect one's AGI. But things that happen above the AGI line can affect the AGI directly and that can affect a host of other tax-wise calculations that employ the AGI (or a modification of the AGI in some cases, such as having to add tax-exempt interest to the AGI to come up with a MAGI).

In terms of tax value, deductions that can be taken above the line (before the AGI is figured) are more valuable than deductions that happen below the line. To that end, the surplus loss one gets from TLHing (surplus = capital loss>capital gain) has immediate value since money now is worth more than money later.

My recommendation is to always harvest losses when you can.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by StevieG72 »

stan1 wrote: Sun Apr 25, 2021 12:00 pm I think the one of the main benefits of tax loss harvesting is psychological and behavioral. It's something actionable you can focus on during a market drop that adds a small amount of value and helps stay the course. Those who focused on tax loss harvesting in March 2020 while maintaining asset allocation surely came out ahead, mostly because they maintained asset allocation.
I was buying in March 2020, I certainly did not not buy at the bottom but made a few purchases on the way down. Ran out of money and enthusiasm well before we hit the low for the year.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by Doc7 »

If you tax loss harvest and donate appreciated shares instead of money, (such as to the Fidelity donor advised fund), you have a Roth IRA equivalent tax free growth that also saves you money on taxes.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by mr_brightside »

...sounds like we got a new member / investor mourning his Gamestop losses... :D

jk

my generation had our own ... Lucent, Enron, Worldcom, etc :oops:

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Re: I don’t understand why tax loss harvesting is that beneficial

Post by I-Know-Nothing »

sperry8 wrote: Sun Apr 25, 2021 3:31 pm
grabiner wrote: Sun Apr 25, 2021 2:43 pm
I-Know-Nothing wrote: Sun Apr 25, 2021 2:28 pm I definitely see what you are saying, but there is a potential downside, isn’t there? I know we can’t speculate on future laws, but tax laws do change. What if they change in a way that makes capital gains not taxed as favorably? If capital gains were taxed as ordinary income, and income taxes rise, wouldn’t it have been better to not tax loss harvest? You may not think there is much risk of such a change, and I wouldn’t disagree, but there is always a risk.
This doesn't even require a change in laws, just a change in your tax situation. Suppose that you currently live in a no-tax state (or a state which doesn't allow capital losses to be deducted) and pay 22% tax on ordinary income. You then move to a high-tax state where you pay 15% tax on long-term gains and 9% state tax, and it might become even worse if your income also rises and you pay 3.8% NIIT for a tax rate of 27.8%.

But it's likely still a net benefit. Suppose that you take a $3000 capital loss against your ordinary income this year and save $660. In a later year, you have a $3000 capital gain taxed at 27.8% and pay $834. It doesn't take that long for an investment of $660 to grow to more than $834.

In addition, you might never pay tax on the shares you buy after the harvest. You might donate them to charity, or leave them to your heirs, or sell them in retirement when you have a 0% tax rate on capital gains.
What I bolded above is quite correct for me. Over the decade+ that I didn't pay CG taxes (due to tax loss harvesting) that money was invested in the market (rather than paid in taxes). A 10 year bull market. This money grew, compounded, over time. I-Know-Nothing, instead you would suggest I should not tax loss harvest due to speculation on future CG tax rates? No thanks. I'll take the compound growth of not paying taxes today in a rising market and let the chips fall where they may in later years. I'm hard pressed to think of a future scenario that would've made the decision I already made a poor one.
Where did I suggest you shouldn’t tax loss harvest? I was just saying it wasn’t clear that there would never be a downside to doing so under any circumstances.
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by I-Know-Nothing »

willthrill81 wrote: Sun Apr 25, 2021 3:36 pm In many situations, TLHing is basically tax deferment (and may result in no taxes at all down the road). It doesn't get much attention around here, but tax gain harvesting can be beneficial in the right circumstances as well.
Are those circumstances always when your income is lower than normal for the year? Like if you were laid off or furloughed or took a lower-paying job? Those are the years someone should tax gain harvest and do Roth conversions, right?
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by jebmke »

I-Know-Nothing wrote: Sun Apr 25, 2021 5:40 pm Are those circumstances always when your income is lower than normal for the year? Like if you were laid off or furloughed or took a lower-paying job?
or a very large deduction on Schedule A
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by rob »

mr_brightside wrote: Sun Apr 25, 2021 5:06 pm my generation had our own ... Lucent, Enron, Worldcom, etc :oops:
Tell me about it - It's still too soon.... Your not "really" tax loss harvesting unless you know how to get a non-traded and worthless security "sold" so you can fill out the tax forms :shock:
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Re: I don’t understand why tax loss harvesting is that beneficial

Post by lazynovice »

Shalom Aleichem wrote: Sun Apr 25, 2021 12:23 pm
MindBogler wrote: Sun Apr 25, 2021 11:58 am
StevieG72 wrote: Sun Apr 25, 2021 11:53 am I don’t see the logic in taking the loss. I have done it once to sell some international and immediately buy a similar fund, but I was looking to simplify my international holdings anyways.

The logic escapes me to sell a total stock market fund and book a huge loss.
If you pair VTI and VOO, for example, their performance is very similar. Selling at a loss in VTI and buying VOO is practically the same as not selling at all, except now your "loss" can be used to offset future gains and/or as a $3000 deduction against ordinary income.
True but your cost basis is now greater and you will pay CG taxes on the greater CG. I think it really depends if CG taxes go up or not. If they go up it's a bad idea. If not it's a not unreasonable idea but not like such a great benefit. Looking at the way the country is going, everyone seems to want to "stick it to the rich" and so I don't think CG taxes are going down. If they are changing it is up.
Do I think MY future CG taxes are going to be higher than MY ordinary rates today? No way. Let’s say they go to equal the ordinary rates.

I am in the 37% bracket today (ignore state taxes). My 3,000 is worth $1,110 in tax savings (3,000 times .37). When I sell that ETF (if I sell it), I will be retired and in the 12% bracket (3,000 times .12) taxes would be $360. As long as I stay below the 37% rate in retirement, I am better off. My future CG rate has to go up beyond my current ordinary rate. Maybe being in the top tax bracket makes it more of a non brainer.
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