TLH for absolute dummies [Tax Loss Harvesting]

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House Blend
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by House Blend » Thu Feb 09, 2017 3:55 pm

goingup wrote:
Lieutenant.Columbo wrote:does TLH get in the way of rebalancing?
When a fund is underperforming we're supposed to buy More of it, Not sell it, aren't we? :?
thanks
No, TLH does not get in the way of rebalancing or purchasing more of the underperforming fund.

Last year I sold $100K of Fund A (FTSE ex US) to buy Fund B (Total Int.). Harvested $12K in losses. Added any new money to Fund A and hoped Fund B would slide enough to sell it, harvest loss, and repurchase Fund A.

So, the method is: Sell losing lots of Fund A and purchase Fund B, the tax loss partner. Continue to add to Fund A. Don't add to Fund B, and don't reinvest dividends. If Fund B tanks, sell all of it and repurchase Fund A. That is the theory. Today I sit with both Fund A & B because no compelling TLH opportunity came.
IMO a bit of qualifying language needs to be added.

If you harvest a loss from A to similar-but-not-substantially-identical B, then it is possible, perhaps even likely, that you are underweight in the asset class X that A and B represent.

If you need more X, then for the next 31 days (counting the day of sale), limit your purchases of X to Fund B (or C, or D,...). Only after that should you consider buying more A.

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goingup
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by goingup » Thu Feb 09, 2017 5:14 pm

House Blend wrote:
goingup wrote:
Lieutenant.Columbo wrote:does TLH get in the way of rebalancing?
When a fund is underperforming we're supposed to buy More of it, Not sell it, aren't we? :?
thanks
No, TLH does not get in the way of rebalancing or purchasing more of the underperforming fund.

Last year I sold $100K of Fund A (FTSE ex US) to buy Fund B (Total Int.). Harvested $12K in losses. Added any new money to Fund A and hoped Fund B would slide enough to sell it, harvest loss, and repurchase Fund A.

So, the method is: Sell losing lots of Fund A and purchase Fund B, the tax loss partner. Continue to add to Fund A. Don't add to Fund B, and don't reinvest dividends. If Fund B tanks, sell all of it and repurchase Fund A. That is the theory. Today I sit with both Fund A & B because no compelling TLH opportunity came.
IMO a bit of qualifying language needs to be added.

If you harvest a loss from A to similar-but-not-substantially-identical B, then it is possible, perhaps even likely, that you are underweight in the asset class X that A and B represent.

If you need more X, then for the next 31 days (counting the day of sale), limit your purchases of X to Fund B (or C, or D,...). Only after that should you consider buying more A.
Good points Houseblend! Yes, don't rule afoul of the wash-sale rule. I bought more of Fund A only after 31 days.

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Lieutenant.Columbo
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Lieutenant.Columbo » Thu Feb 09, 2017 11:08 pm

House Blend wrote:If you harvest a loss from A to similar-but-not-substantially-identical B, then it is possible, perhaps even likely, that you are underweight in the asset class X that A and B represent.

If you need more X, then for the next 31 days (counting the day of sale), limit your purchases of X to Fund B (or C, or D,...). Only after that should you consider buying more A.
thank you very much,
Once the 31 days are up, how does one determine when it is time to sell Fund B to buy Fund A? (Only when one can TLH from Fund B, maybe?)
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by bbrock » Sat Feb 11, 2017 6:47 pm

Lieutenant.Columbo wrote:
House Blend wrote:If you harvest a loss from A to similar-but-not-substantially-identical B, then it is possible, perhaps even likely, that you are underweight in the asset class X that A and B represent.

If you need more X, then for the next 31 days (counting the day of sale), limit your purchases of X to Fund B (or C, or D,...). Only after that should you consider buying more A.
thank you very much,
Once the 31 days are up, how does one determine when it is time to sell Fund B to buy Fund A? (Only when one can TLH from Fund B, maybe?)
Exactly. When you could TLH it, that's when it's time to sell B.
bbrock

cc111
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by cc111 » Tue Mar 21, 2017 4:33 pm

Hi, I'm a newbie and have a question about TLH. If I have a tech stock, A, that has long term capital loss, and I hold ETFs in my portfolio that are composed of stock A. If i want to do TLH, do I stop "reinvest dividend" and monthly contributions that will purchase more shares of these ETFs? Does it matter if these ETFs are in a taxable account or tax sheltered accounts? Thanks!

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Earl Lemongrab
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Earl Lemongrab » Tue Mar 21, 2017 5:31 pm

cc111 wrote:Hi, I'm a newbie and have a question about TLH. If I have a tech stock, A, that has long term capital loss, and I hold ETFs in my portfolio that are composed of stock A. If i want to do TLH, do I stop "reinvest dividend" and monthly contributions that will purchase more shares of these ETFs? Does it matter if these ETFs are in a taxable account or tax sheltered accounts? Thanks!
Do you think that the ETF is substantially identical to the individual stock?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by retiredjg » Tue Mar 21, 2017 5:54 pm

cc111 wrote:Hi, I'm a newbie and have a question about TLH. If I have a tech stock, A, that has long term capital loss, and I hold ETFs in my portfolio that are composed of stock A. If i want to do TLH, do I stop "reinvest dividend" and monthly contributions that will purchase more shares of these ETFs? Does it matter if these ETFs are in a taxable account or tax sheltered accounts? Thanks!
Is it even possible to hold an ETF that is composed of just one stock?

If you mean an ETF that has hundreds of stocks, one of which happens to be Stock A, there is no TLH or wash sale problem.

cc111
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by cc111 » Tue Mar 21, 2017 7:13 pm

retiredjg wrote:
cc111 wrote:Hi, I'm a newbie and have a question about TLH. If I have a tech stock, A, that has long term capital loss, and I hold ETFs in my portfolio that are composed of stock A. If i want to do TLH, do I stop "reinvest dividend" and monthly contributions that will purchase more shares of these ETFs? Does it matter if these ETFs are in a taxable account or tax sheltered accounts? Thanks!
Is it even possible to hold an ETF that is composed of just one stock?

If you mean an ETF that has hundreds of stocks, one of which happens to be Stock A, there is no TLH or wash sale problem.
I have x shares of stock A, at a capital loss. I want to sell the stock to realize the long term capital loss (to offset long term capital gain). I think I have some ETFs in my portfolio that also contains this stock A in its composition (have to double check). If I want to take advantage of TLH, but my ETFs are on auto reinvest dividend and i also have monthly deposits that are auto invested in such ETFs,should I stop these monthly deposits and auto reinvest dividend for a month so I don't get a wash sale. I hope I make sense. Thanks again.

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Lieutenant.Columbo
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Lieutenant.Columbo » Tue Mar 21, 2017 7:18 pm

cc111 wrote:I have x shares of stock A, at a capital loss. I want to sell the stock to realize the long term capital loss (to offset long term capital gain). I think I have some ETFs in my portfolio that also contains this stock A in its composition (have to double check). If I want to take advantage of TLH, but my ETFs are on auto reinvest dividend and i also have monthly deposits that are auto invested in such ETFs,should I stop these monthly deposits and auto reinvest dividend for a month so I don't get a wash sale. I hope I make sense. Thanks again.
cc111,
I take the liberty to interpret what Earl Lemongrab and retiredjg are saying:

Even if the ETF holds shares of the same company you own individual shares, that does not make "your individual shares" substantially identical to the "ETF as a whole". And, therefore, keeping the ETF on auto-reinvest will not trigger a wash sale when trying to TLH by selling the individual stocks.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by baughman » Tue May 23, 2017 3:11 pm

I've spent a dozen of hours reading this thread, the wiki (https://www.bogleheads.org/wiki/Tax_loss_harvesting), and fairmark for insights on TLH. I currently have $0 in taxable accounts, but plan on dollar cost averaging several hundred thousand into taxable accounts in the near future. Thanks to AMT and state income taxes, my effective marginal tax rate is 45%. As a result, I have a huge incentive to TLH (45%*3k=$1,350/year).

I understand the mechanics of TLH are simple, but there are nuances that can get people into trouble.

In my hours of reading I believe I've synthesized all information into the following set of rules, which are perhaps a bit more simple or clear than the one highlighted in the beginning of this thread. Take as a base scenario a 2-fund target portfolio (70% VTSAX and 30% VTIAX) that is replicated across my taxable, my Roth IRA, and my wife's Roth IRA. My holdings in my 403b/401a/457 can be ignored for reasons discussed in previous threads.

Step 0. Turn off dividend reinvestments in all accounts (taxable + Roths x 2).

Step 1. Not required for TLH, but a good best practice to avoid non-qualified dividends is to buy shares in the 30-day window after a dividend is paid (https://www.bogleheads.org/wiki/Timing_ ... tributions). Let's assume that all purchases fall within the 30-day window after dividends, which will guarantee that any funds will be held >60 days before distribution. Given my high tax rate, I would prefer to avoid non-qualified dividends. Aside from a good best-practice, it makes the example easier to follow.

Step 2. Check for TLH opportunities once per quarter after a dividend is paid out. Why quarterly? Stocks drop after dividends are paid out, thereby maximizing the potential tax loss. If the current price is less than the purchase price, sell and harvest the loss. Following the assumption in Step 1 above, we know that the most recent purchase was well over 30 days before, so no issue there.

Step 3. Once sold, we have a few options. The simplest is to sit in a money market fund for 30 days then rebuy the same fund, though this is unsettling to those who hate being out of the market (like myself). A more complicated option is to buy a fund that is "not substantially identical", which I understand can be funds that track different indices. For domestic, sell VTSAX and buy VFIAX (or vice versa if harvesting a loss on VFIAX). For international, sell VTIAX and buy VFWAX (or vice versa if harvesting a loss on VFWAX).

Step 4. If a loss was not harvested in Step 2, manually reinvest dividends immediately in Roth IRA. If a loss was not harvested in Step 2, manually reinvest dividends in Roth IRA 30-60 days after distribution (closer to 30 the better, of course).

Step 5. Rinse and repeat Steps 2-4 once per quarter, immediately after the dividend is paid out. Since VTSAX and VTIAX pay dividends on the same date, this is easy to manage 4x/year. If I recently harvested VTSAX to purchase VFIAX and I care to continue to DCA this quarter, I'd resume my regularly scheduled DCA programming by buying more VFIAX in lieu of VTSAX. This flexible and arbitrary switching of target funds is key to the strategy.

Am I missing something? Seems just about as well as one could do and much simpler than what has been described previously. And it only requires you to check for opportunities 4x/year.

Doing the above will essentially lock in the cost basis for each share at it's minimum, maximizing the tax loss in the harvest.
Last edited by baughman on Tue May 23, 2017 7:52 pm, edited 1 time in total.

livesoft
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Tue May 23, 2017 3:27 pm

I think it is pretty trivial to check for losses more often. Sometimes even large losses are fleeting.

Here is one automatic way of setting when to check for losses: Set up an alert at Vanguard to automatically send a message to your smart phone when VTSAX or VTIAX have dropped at least 2.5% (or 2% or something else) in one day. That doesn't guarantee that you will need to TLH, but at least you can look at those times because you got a message to look.

Question: For all of 2016, how many times would you have received an alert?

Presumably if you were DCA'ing, then you would at least look to see if you have anything to harvest on the day you were going to buy something. That is, if you had losses in VTIAX, then you would buy VFWAX instead. But what if you have losses in both VTIAX and VFWAX?
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by baughman » Tue May 23, 2017 4:06 pm

livesoft wrote:I think it is pretty trivial to check for losses more often. Sometimes even large losses are fleeting.

Here is one automatic way of setting when to check for losses: Set up an alert at Vanguard to automatically send a message to your smart phone when VTSAX or VTIAX have dropped at least 2.5% (or 2% or something else) in one day. That doesn't guarantee that you will need to TLH, but at least you can look at those times because you got a message to look.

Question: For all of 2016, how many times would you have received an alert?

Presumably if you were DCA'ing, then you would at least look to see if you have anything to harvest on the day you were going to buy something. That is, if you had losses in VTIAX, then you would buy VFWAX instead. But what if you have losses in both VTIAX and VFWAX?
I think we're in agreement that it makes no sense to check more often than quarterly. I see the wisdom in your proposed automated alert system, but I still prefer my quarterly manual check though. Why? With the email alert you need to worry about all of the wash sale timing issues. With the quarterly manual check, simply put the quarterly dividends on your google calendar and check 4x/year. With my approach, the timing has been optimized before hand and the issue of wash sales is completely moot.

I'm using the term DCA loosely in my example to refer to quarterly after dividend distribution to avoid the wash sale problem. If VTIAX and VFWAX are both down (a likely scenario given their high correlation), I'd harvest both losses and buy VTSAX. If the size of the loss is large enough to significantly alter my portfolio allocation, so I can rebalance appropriately in 403b/401a/457. A more likely scenario is the the particular loss activity is small relative to my portfolio, so rebalancing in 403b/401a/457 is moot. Even if it weren't, with a 45% effective marginal tax rate I'll take an out-of-balance portfolio in exchange for a 45% tax benefit on the harvesting of the loss.

If international and domestic are both significantly down, I'd probably sell both, sit out 30 days, then rebuy both.

I can see the wisdom of the sit out 30 day approach advocated elsewhere on the forum. It simplifies the problem greatly and the number of tickers in one's portfolio doesn't explode. However, I personally can't stomach being out of the market.

I agree there have been few opportunities for TLH in 2016, but who knows what the future will bring. TLH is a nice tool to understand, particularly for those with high effective marginal tax rates. Too bad it's capped at $3k/year (though carry-forwards obviously help).

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by boglephreak » Tue May 23, 2017 4:39 pm

livesoft wrote:I think it is pretty trivial to check for losses more often. Sometimes even large losses are fleeting.

Here is one automatic way of setting when to check for losses: Set up an alert at Vanguard to automatically send a message to your smart phone when VTSAX or VTIAX have dropped at least 2.5% (or 2% or something else) in one day. That doesn't guarantee that you will need to TLH, but at least you can look at those times because you got a message to look.

Question: For all of 2016, how many times would you have received an alert?

Presumably if you were DCA'ing, then you would at least look to see if you have anything to harvest on the day you were going to buy something. That is, if you had losses in VTIAX, then you would buy VFWAX instead. But what if you have losses in both VTIAX and VFWAX?
i check whenever the "US Stocks in Free Fall" thread gets bumped. its not a reliable indicator of TLH opportunities though. =)

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Olemiss540 » Fri Feb 09, 2018 12:40 pm

Figured it might be an optimum time to put this post back on the front page to discuss opportunities to do some "winter harvesting". :sharebeer
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by hudson » Wed Feb 14, 2018 6:49 pm

Does it matter if the loss is short term or long term?
Would you TLH for a $400 loss?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Wed Feb 14, 2018 6:55 pm

It doesn't matter if loss is short or long, but short is better. I try to harvest losses before they become long-term losses, but sometimes with huge market dumps, a position goes from LT gain to LT loss, so I would harvest it then.

I would TLH for $400 unless it was December. Others might do something else.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by sgadlin » Fri Feb 16, 2018 9:35 am

I am somewhat confused on one aspect of TLH. I am paid biweekly, and like to be in the habit of paying myself first. Therefore I make biweekly investments into my vanguard taxable account. I have a 2 fund portfolio with VTSAX, and VTIAX. I have the cost basis on specific id. Lets use VTSAX for a hypothetical example, if I have lots I bought on
1/1/18
1/15/18
2/1/18


Lets say the market dipped on 2/5/18, and I had short term loss on 2/1/18 lot and the other previous were barely positive. Would I have to sell all 3 lots at the same time because they are within 30 days of each other, or is it 30 days of the date I decided to sell in this case 2/5/18?
Thanks

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by ivk5 » Fri Feb 16, 2018 2:16 pm

sgadlin wrote:
Fri Feb 16, 2018 9:35 am
I am somewhat confused on one aspect of TLH. I am paid biweekly, and like to be in the habit of paying myself first. Therefore I make biweekly investments into my vanguard taxable account. I have a 2 fund portfolio with VTSAX, and VTIAX. I have the cost basis on specific id. Lets use VTSAX for a hypothetical example, if I have lots I bought on
1/1/18
1/15/18
2/1/18


Lets say the market dipped on 2/5/18, and I had short term loss on 2/1/18 lot and the other previous were barely positive. Would I have to sell all 3 lots at the same time because they are within 30 days of each other, or is it 30 days of the date I decided to sell in this case 2/5/18?
Thanks
It's 30 days before/after sale. So if you really want to avoid a wash sale, you'd need to sell the 1/15 lot in addition to the 2/1 lot, but not the 1/1 lot.

If you sell only the 2/1 lot, the 1/15 shares are deemed replacement shares and you will generate a wash sale, which will adjust the basis of the 1/15 lot.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by investor997 » Fri Feb 16, 2018 2:35 pm

I recently executed a TLH of VTI due to this month's market downturn. Note that I normally buy VTI on a biweekly basis coincident with my pay period, so I have quite a few small lots of shares to choose from. Scottrade, my broker, offers several different choices for recording gains and losses, the default of which is FIFO (first-in, first-out). When I executed the TLH, the system recorded the transaction as being FIFO, which resulted in the recording of a capital gain rather than a loss since the older shares were bought for a lot less. I was able to catch this before the trade settled and changed the strategy to "Highest In, First Out". The system then correctly chose the most recent (and expensive) lots, recording the loss as I expected.

Someone recently told me that from here on out, I have to stick to this sales strategy for this particular holding (HIFO). Is this true?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Fri Feb 16, 2018 3:26 pm

investor997 wrote:
Fri Feb 16, 2018 2:35 pm
Someone recently told me that from here on out, I have to stick to this sales strategy for this particular holding (HIFO). Is this true?
No, this is not true. HIFO is just a subclass of Specific Identification where your broker looks for you and specifically identifies the shares to sell.

Furthermore, since VTI is an ETF, I don't believe you could select Average Cost anyways which is the biggest bugaboo with TLH.
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LuigiLikesPizza
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by LuigiLikesPizza » Sat Apr 21, 2018 4:46 pm

RE: the issue of short term versus long term losses:

For the past few years, I’ve made new contributions only to my tax-advantaged accounts.

New money coming into my taxable accounts has consisted only of quarterly contributions from dividend payments.

In short, I guess this means most shares sold at a loss, will have been held long term. Provided that I pick a date and make no new contributions within 30 days of that date – and as long as I can identify the cost basis of those shares – do you see other issues here? (i.e. long-term holdings)

Thank you.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by GMan82 » Sat Jun 02, 2018 3:50 pm

Quick question, after having gone through this whole thread. I have no opportunities to TLH yet as all my shares in taxable (VTSAX and VTIAX) all have some gain, and this goes back to Sept 2015. In any case, I'm pretty sure an opportunity will eventually present itself.

How are losses that can be carried over tracked? If I'm only at Vanguard, and say I have $5000 in losses, $3000 of which are used up on my tax return, do I have to manually keep track of the $2000 that I can carry-over to the next year?

For those of you who TLH'ed during the Great Recession and have losses that you've been able to carry through til now, how have you kept track of how much "credit" remains to be used?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Sat Jun 02, 2018 4:16 pm

LuigiLikesPizza wrote:
Sat Apr 21, 2018 4:46 pm
RE: the issue of short term versus long term losses:

...– do you see other issues here? (i.e. long-term holdings)

Thank you.
The issue here is that one should almost NEVER have any long-term losses. Shares held long-term should have appreciated very nicely over years. Furthermore, if any shares have losses and are nearing the time point where they would be held long-term (11 months, 11 months 2weeks), then they should have been tax-loss harvested already.

Selling losers before they go long-term is good practice to overcome the behavioral finance trap of loss aversion.

Yes, if the stock market dumps like in early 2009, then one can have long-term losses crop up, so harvest them, too.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Sat Jun 02, 2018 4:18 pm

GMan82 wrote:
Sat Jun 02, 2018 3:50 pm
Quick question, after having gone through this whole thread. I have no opportunities to TLH yet as all my shares in taxable (VTSAX and VTIAX) all have some gain, and this goes back to Sept 2015. In any case, I'm pretty sure an opportunity will eventually present itself.

How are losses that can be carried over tracked? If I'm only at Vanguard, and say I have $5000 in losses, $3000 of which are used up on my tax return, do I have to manually keep track of the $2000 that I can carry-over to the next year?

For those of you who TLH'ed during the Great Recession and have losses that you've been able to carry through til now, how have you kept track of how much "credit" remains to be used?
The loss numbers end up on your tax return and are tracked there. Presumably, you keep track of your tax returns and by doing so you automatically keep track of your carryover losses.
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GMan82
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by GMan82 » Sat Jun 02, 2018 9:20 pm

Thanks as usual, @Livesoft!
Yup, I keep a copy of my tax returns in my Dropbox, so I guess I would be tracking it. I had no idea the tax returns kept track of your TLH carryover! Now I really feel like I’ve been missing out!

I plan on adding Intl Small Cap (VSS) to my Taxable. I’m not sure of a TLH partner yet, but it seems like a volatile enough ETF that some opportunities may present themselves. Your algorithm will then be very helpful.

Regarding the final part of that algorithm where Thanksgiving is mentioned, I’m assuming you mean that it’s probably best to TLH during the short-term losses period as long as the losses amount to >3% of the value being harvested.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by JustinR » Sat Jun 02, 2018 11:02 pm

People who use TurboTax or TaxAct, is it easy to input your losses and is the $3000 automatically deducted for you?

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Earl Lemongrab
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Earl Lemongrab » Sun Jun 03, 2018 12:04 am

JustinR wrote:
Sat Jun 02, 2018 11:02 pm
People who use TurboTax or TaxAct, is it easy to input your losses and is the $3000 automatically deducted for you?
Certainly with Block software, and I'm sure the others.

hudson
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by hudson » Sun Jun 03, 2018 6:18 am

JustinR wrote:
Sat Jun 02, 2018 11:02 pm
People who use TurboTax or TaxAct, is it easy to input your losses and is the $3000 automatically deducted for you?
For H&R Block Deluxe 2017...to see what your short and long term carryover losses are for 2018.
Go to print your tax return and print it with everything...all of the H&R Block worksheets....to a PDF.
Go to the Schedule D worksheet and scroll down about 5 pages...I think it's actually on page 2...but page 2 is long.
You'll find the "CAPITAL LOSS CARRYOVER WORKSHEET"...with short and long term carryover losses.
Note: If this is confusing, ask questions, I'll restate it another way. (A PDF is a way to save a copy of your return to a file instead of printing it on paper)

Hopefully there's a faster way; it took me a while to find it.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by fujiters » Tue Jun 05, 2018 3:11 am

livesoft wrote:
Wed Feb 14, 2018 6:55 pm
I would TLH for $400 unless it was December. Others might do something else.
Dummy question: what's special about December?
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

livesoft
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Tue Jun 05, 2018 6:00 am

December is special because it is the last month of the tax year for most taxpayers. I might TLH even for less than $400 in December as already mentioned.
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pkay
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by pkay » Tue Jul 24, 2018 1:36 pm

I've read pages of this and other threads and am still not 100% clear if the following scenario is considered tax loss harvesting. Could someone enlighten me please?

Say if I sell an ETF or mutual fund for short term loss. Instead of "exchange" the losing ETF/mutual fund, I transfer the money to MMF and wait 31 days and reinvest in the same ETF/mutual fund. Is this still TLH? Can I still use the short term loss to offset other short term gains (then long term gains, and finally $3000 against ordinary income) in the same year?

What could the potential pros and cons of doing this other than I lose out in being in the market for 31 days?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by hudson » Tue Jul 24, 2018 6:44 pm

pkay wrote:
Tue Jul 24, 2018 1:36 pm
I've read pages of this and other threads and am still not 100% clear if the following scenario is considered tax loss harvesting. Could someone enlighten me please?

Say if I sell an ETF or mutual fund for short term loss. Instead of "exchange" the losing ETF/mutual fund, I transfer the money to MMF and wait 31 days and reinvest in the same ETF/mutual fund. Is this still TLH? Can I still use the short term loss to offset other short term gains (then long term gains, and finally $3000 against ordinary income) in the same year?

What could the potential pros and cons of doing this other than I lose out in being in the market for 31 days?
I'm still a novice at TLH...but I've done a few. If I sold the ETF VTI (total stock market), I would exchange it for something about the same like VOO (S&P 500) and hold it for 31 days...maybe longer. I might leave it until there is another loss. I would not leave it in a cash type fund for 31 days.

A short term loss TLH will offset short term gains or ordinary income(3K max...then carry over) if there aren't any short term gains. I don't believe they would offset long term gains...not sure. (Short term TLHs are more desired if your tax rate is higher than the long term capital gain rate.)

If you exchange to a similar ETF or fund, you aren't out of the market for 31 days.
I could never fully understand it without doing the TLH and the tax return. (and reading this and other TLH discussions)

Did I get that right?
Last edited by hudson on Tue Jul 24, 2018 7:15 pm, edited 2 times in total.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Tue Jul 24, 2018 6:49 pm

pkay wrote:
Tue Jul 24, 2018 1:36 pm
I've read pages of this and other threads and am still not 100% clear if the following scenario is considered tax loss harvesting. Could someone enlighten me please?

Say if I sell an ETF or mutual fund for short term loss. Instead of "exchange" the losing ETF/mutual fund, I transfer the money to MMF and wait 31 days and reinvest in the same ETF/mutual fund. Is this still TLH? Can I still use the short term loss to offset other short term gains (then long term gains, and finally $3000 against ordinary income) in the same year?

What could the potential pros and cons of doing this other than I lose out in being in the market for 31 days?
It is still TLH.
Yes, you can use the loss to offset gains, short first, then long, then up to $3,000 against ordinary income, then carryover to next tax year.

Generally, I don't want to TLH into a MMF because I am selling low when everything that I might want to buy is also low. I like to buy low. I don't want to be out of the market when things are low. If what I buy drops lower, then I TLH it, too, and I buy something (maybe the original investment) then when it is at an even lower price. Did I mention that you want to buy low? The best time to TLH is at the lowest price of the year which should be one of the times with the most loss.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by pkay » Wed Jul 25, 2018 8:31 am

Haha, got your point. Thank you, Livesoft.

I have two more questions for you and anyone reading this:

1. Is there an advantage when tax loss harvesting an ETF or a mutual fund? Then a sub-question, could I TLH an mutual fund for an ETF or vice versa?

2. Do you have any suggestion on how to set up a portfolio that is comprised of one 401k (Fido), one 457 (TRowePrice), and two Roth IRAs (both at VG), and a taxable account at VG? I've TLH twice and it was a hassle just to make sure I don't create wash sales with substantially identical funds in the tax-sheltered accounts. Also, spouse and I make ongoing contributions to our 401k ad 457 plans (we are still working), and there is always a delay when we initiate contribution changes to the funds in our employer-sponsored accounts. This makes it more difficult for us to ensure the 31 days prior to TLH rule to prevent a wash sale.

Appreciate your time and help!

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Earl Lemongrab » Wed Jul 25, 2018 11:07 am

pkay wrote:
Wed Jul 25, 2018 8:31 am
Haha, got your point. Thank you, Livesoft.

I have two more questions for you and anyone reading this:

1. Is there an advantage when tax loss harvesting an ETF or a mutual fund? Then a sub-question, could I TLH an mutual fund for an ETF or vice versa?
I think most believe that funds that are share classes of the same underlying fund would be substantially identical. After all, you can convert between some of them and not have a taxable sale. So switching VTSAX for VTI (via a sell and buy versus conversion) would probably be a wash sale. However, I don't know if Vanguard automatically designates those as wash sales.
2. Do you have any suggestion on how to set up a portfolio that is comprised of one 401k (Fido), one 457 (TRowePrice), and two Roth IRAs (both at VG), and a taxable account at VG? I've TLH twice and it was a hassle just to make sure I don't create wash sales with substantially identical funds in the tax-sheltered accounts. Also, spouse and I make ongoing contributions to our 401k ad 457 plans (we are still working), and there is always a delay when we initiate contribution changes to the funds in our employer-sponsored accounts. This makes it more difficult for us to ensure the 31 days prior to TLH rule to prevent a wash sale.
Only IRAs have been mentioned in the IRS revenue ruling and publications as participating in wash sales. I would not worry about the other plans mentioned.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by lm » Wed Jul 25, 2018 12:32 pm

Earl Lemongrab wrote:
Wed Jul 25, 2018 11:07 am
Only IRAs have been mentioned in the IRS revenue ruling and publications as participating in wash sales. I would not worry about the other plans mentioned.
Does that mean that I can sell a fund in taxable, and buy the same (or substantially similar) fund in a 401k account on the same day without triggering a wash sale?

For example, let's say I have a S&P500 index fund in taxable and a bond fund in a 401k account. When stocks are down, could I sell some in taxable and buy the bond fund instead, and do the opposite in the 401k to keep the overall asset allocation the same. 31 days later I would revert the step: in the 401k, sell the stocks (without having to worry about capital gains) and re-buy the bond fund, and in taxable sell the bond fund (which likely has small gains, if any) and but the stock index fund again.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Wed Jul 25, 2018 12:40 pm

lm wrote:
Wed Jul 25, 2018 12:32 pm
Earl Lemongrab wrote:
Wed Jul 25, 2018 11:07 am
Only IRAs have been mentioned in the IRS revenue ruling and publications as participating in wash sales. I would not worry about the other plans mentioned.
Does that mean that I can sell a fund in taxable, and buy the same (or substantially similar) fund in a 401k account on the same day without triggering a wash sale?
Yes, that is what that statement means to Earl Lemongrab and many others, but not everyone else. I think it is so trivial to come up with decent alternatives that there is almost no point in trying to do exactly this. I think one should use such an opportunity to learn how to be conservative with IRS wash sales rules even if one does not have to be. It's just good practice.

A friend of mine who is an accountant told me once, "There are accountants who are aggressive in the interpretations of IRS writings and there are accountants who take a more conservative approach." I got from that the sometimes rules and laws are unclear until settled in court.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by lm » Wed Jul 25, 2018 12:57 pm

livesoft wrote:
Wed Jul 25, 2018 12:40 pm
lm wrote:
Wed Jul 25, 2018 12:32 pm
Earl Lemongrab wrote:
Wed Jul 25, 2018 11:07 am
Only IRAs have been mentioned in the IRS revenue ruling and publications as participating in wash sales. I would not worry about the other plans mentioned.
Does that mean that I can sell a fund in taxable, and buy the same (or substantially similar) fund in a 401k account on the same day without triggering a wash sale?
Yes, that is what that statement means to Earl Lemongrab and many others, but not everyone else. I think it is so trivial to come up with decent alternatives that there is almost no point in trying to do exactly this. I think one should use such an opportunity to learn how to be conservative with IRS wash sales rules even if one does not have to be. It's just good practice.
Thanks, livesoft. In general I rather err on the side of caution. Perhaps a more relevant scenario than the one I posted above is the following: Part of my twice-monthly 401k contributions go into a total stock market index fund. I also have a fund that tracks the same index in taxable. I thought that the regular contributions to the retirement account essentially prevent me from harvesting losses in the taxable account because it would be considered a wash sale. It would be nice if that wasn't actually the case.

What would be the best way to do in this situation? Should I try to use stock funds that track different indices in different accounts?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Earl Lemongrab » Wed Jul 25, 2018 1:08 pm

If the IRS meant to include 401(k), why didn't they? The original revenue ruling was a fairly lengthy document detailing extensive research they had done. They went over a bunch of reasons why IRAs should be included from that point on. Do you think they forgot about other accounts in the process? Do you think, contrary to their normal method of instituting rule changes, they'll just start applying this to random taxpayers.

There a number of reasonable counterarguments against the point. One being that workplace plans have forced regular contributions. Another is that they often have very restricted selections, so choosing an alternative is difficult and burdensome on the taxpayer.

There's caution, then there's unfounded paranoia. There are already a lot of IRS rules without making up new ones for them. I throw this into the "step transaction for backdoor Roth" category.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Wed Jul 25, 2018 1:14 pm

lm wrote:
Wed Jul 25, 2018 12:57 pm
What would be the best way to do in this situation? Should I try to use stock funds that track different indices in different accounts?
I have some of the same funds in taxable, iRAs, and 401(k)s.

I don't know about "the best way" for you and others, but for me, I just keep myself aware of my contributions and also don't automatically reinvest dividends in taxable.

I haven't done it, but I suppose if one was automatically investing in a taxable account, then one could use something like the following:
1. Bimonthly schedule instead of monthly.
2. Invest in Total US Stock Market Index in even-numbered months and Total International in odd-numbered months.

And yes, one could use funds that tracked different indices among their various accounts. Or one could use a fund of funds in tax-adantaged.

There are so many possibilities that it almost doesn't make sense to me to come up with rules. After all, tax-loss harvesting is not supposed to be something that one does very often.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Wed Jul 25, 2018 1:21 pm

Earl Lemongrab wrote:
Wed Jul 25, 2018 1:08 pm
If the IRS meant to include 401(k), why didn't they? The original revenue ruling was a fairly lengthy document detailing extensive research they had done. They went over a bunch of reasons why IRAs should be included from that point on. Do you think they forgot about other accounts in the process? Do you think, contrary to their normal method of instituting rule changes, they'll just start applying this to random taxpayers.

There a number of reasonable counterarguments against the point. One being that workplace plans have forced regular contributions. Another is that they often have very restricted selections, so choosing an alternative is difficult and burdensome on the taxpayer.

There's caution, then there's unfounded paranoia. There are already a lot of IRS rules without making up new ones for them. I throw this into the "step transaction for backdoor Roth" category.
I agree with what you wrote. I think for 401(k)s to be included, there will have to be test case and an IRS ruling. I doubt a small fry taxpayer is going to be the test case ever. But as for IRS only including IRAs nowadays, I can see where whoever was responsible for the 2008 write-up did not want to create extra work for themselves and a lot of backlash, so they kept the write-up restricted to the task at hand. That is, they didn't forget about other accounts, but consciously excluded them to just get the IRA thing out there and make 401(k)s someone else's problem for the future.

For the 401(k) counterarguments, they have been mentioned before. The counter to the counterargument is that self-directed 401(k)s and in particule individual 401(k)s do not have such forced regular contributions nor very restricted selections. Thus, another tax court ruling will probably happen in the future.

But the issue is way beyond "TLH for absolute dummies" :) :)
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by lm » Wed Jul 25, 2018 2:30 pm

Thank you for your insights. I am surprised that this seems to be a grey area, as I feel that this should apply to a large number of people especially on this forum, which stresses simplicity and a small selection of funds. Just to make sure I understand, let me re-iterate the question:

Imagine an investor who
(1) makes automatic and regular (say, twice monthly) contributions to a mutual fund through his/her retirement plan such as a 401k, and who
(2) owns the same (or a similar) fund in a taxable account.

Would (1) cause wash sales when trying to harvest tax losses of (2)? My impression so far is that Earl would say no, while livesoft would caution that it's undecided. Is that correct?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Earl Lemongrab » Wed Jul 25, 2018 2:38 pm

livesoft wrote:
Wed Jul 25, 2018 1:21 pm
For the 401(k) counterarguments, they have been mentioned before. The counter to the counterargument is that self-directed 401(k)s and in particule individual 401(k)s do not have such forced regular contributions nor very restricted selections. Thus, another tax court ruling will probably happen in the future.
The fact that there are exceptions for some taxpayers is irrelevant. The rules have to be fairly applied.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by retiredjg » Wed Jul 25, 2018 2:38 pm

lm wrote:
Wed Jul 25, 2018 2:30 pm
Would (1) cause wash sales when trying to harvest tax losses of (2)? My impression so far is that Earl would say no, while livesoft would caution that it's undecided. Is that correct?
Kind of.

Earl would say no. I would also say no. However, I think "undecided" is the wrong term for what livesoft said.

The IRS has never ruled one way or the other. Some people think that means one thing. Some people think that means another thing. So "unknown" seems closer to being accurate than "undecided". I think the IRS has certainly decided. They just have not put it in writing.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by UncleLeo » Sun Feb 10, 2019 11:19 pm

Thank you for this awesome guide!
I did TLH for the first time and have a few questions.
* on Dec 28th I converted part of my VTSAX fund to VLCAX and part of my VTIAX fund to VFWAX (Vanguard).
* At that day the cost basis method was not specID so I requested to change it to specID (and it is now changed).
* I did not change the reinvestment policy (kept dividends reinvested), luckily for the following 31 days the funds did not distribute any dividends.
* However, both funds distributed dividends within 30 days prior to that and since I did not plan the TLH in advance, those dividends were reinvested.
* I hold VTSAX and VTIAX in rothIRA accounts (only with Vangaurd), I do not own any substantially identical funds with any other company).

My questions:
1. Vanguard sent 1099B reflecting the above. The "Wash sale loss disallowed" column seems to include all the dividends that were reinvested within 30 day prior to the TLH across all my VTSAX and VTIAX funds in all of Vanguard accounts. Given all the above, I should be good if I simply enter the 1099B details with the "Wash sale loss disallowed" in the tax software, am I right? Just want to make sure I didn't miss anything since it's my first time.

2. I'd really like to "keep it simple" and return to having just VTSAX and VTIAX. However the market has gone up since then. Does that mean I'm stuck with VLCAX and VFWAX? I can wait a year and then exchange back, but even then if the funds went up I'll be paying long term cap gains. Any workarounds here?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Mon Feb 11, 2019 7:29 am

UncleLeo wrote:
Sun Feb 10, 2019 11:19 pm
1. Vanguard sent 1099B reflecting the above. The "Wash sale loss disallowed" column seems to include all the dividends that were reinvested within 30 day prior to the TLH across all my VTSAX and VTIAX funds in all of Vanguard accounts. Given all the above, I should be good if I simply enter the 1099B details with the "Wash sale loss disallowed" in the tax software, am I right? Just want to make sure I didn't miss anything since it's my first time.

2. I'd really like to "keep it simple" and return to having just VTSAX and VTIAX. However the market has gone up since then. Does that mean I'm stuck with VLCAX and VFWAX? I can wait a year and then exchange back, but even then if the funds went up I'll be paying long term cap gains. Any workarounds here?
1. Yes.

2. There are a few things you can do.
a. Redefine "keep it simple" to mean you need at least 2 funds for each asset class and not worry about it.
b. Wait for newish holdings to go long term or to have losses and sell them.
c. Wait for newish holdings to go long term and donate them to your donor advised fund, so that you don't have to pay taxes on the gain.
d. Wait for newish holdings to go long term and give to child or another non-spouse family member and let them deal with it.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by hungrywave » Thu May 30, 2019 12:25 pm

Thanks a million, Roothy! I searched the internet long and hard before finally readying this. It actually came up highly on Google but I thought it would be for "absolute dummies" - which I would say it is not... For example, it explains what happens if you tax loss harvest after a reinvested dividend. Most of the mainstream articles on TLH don't explain this... Thank you! :sharebeer
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by ma21n2 » Thu Jul 04, 2019 7:43 pm

House Blend wrote:
Thu Feb 09, 2017 3:55 pm
goingup wrote:
Lieutenant.Columbo wrote:does TLH get in the way of rebalancing?
When a fund is underperforming we're supposed to buy More of it, Not sell it, aren't we? :?
thanks
No, TLH does not get in the way of rebalancing or purchasing more of the underperforming fund.

Last year I sold $100K of Fund A (FTSE ex US) to buy Fund B (Total Int.). Harvested $12K in losses. Added any new money to Fund A and hoped Fund B would slide enough to sell it, harvest loss, and repurchase Fund A.

So, the method is: Sell losing lots of Fund A and purchase Fund B, the tax loss partner. Continue to add to Fund A. Don't add to Fund B, and don't reinvest dividends. If Fund B tanks, sell all of it and repurchase Fund A. That is the theory. Today I sit with both Fund A & B because no compelling TLH opportunity came.
IMO a bit of qualifying language needs to be added.

If you harvest a loss from A to similar-but-not-substantially-identical B, then it is possible, perhaps even likely, that you are underweight in the asset class X that A and B represent.

If you need more X, then for the next 31 days (counting the day of sale), limit your purchases of X to Fund B (or C, or D,...). Only after that should you consider buying more A.
I add money into my taxable brokerage account twice a month. If I sold Fund A at a loss and replaced it with Fund B, is there a good reason for buying Fund A instead of Fund B with my regular investments? I understand you shouldn’t buy Fund A for 30 days, but I don’t quite get why you’d start buying Fund A after 30 days.

My thinking is, as long as price keeps going up since TLH, I’d want to keep directing new money to Fund B, so when the market drops, I can sell Fund B shares and buy Fund A. (And then I’d keep buying Fund A with regular investments) Otherwise, I’m more likely to end up with losses in both Fund A and Fund B. Am I missing something? Thanks!

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by livesoft » Thu Jul 04, 2019 7:51 pm

For one thing you are missing that the market doesn't always drop.

Also, you never end up with losses because you sell all your losing shares before the end of the tax year.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by ma21n2 » Thu Jul 04, 2019 8:59 pm

livesoft wrote:
Thu Jul 04, 2019 7:51 pm
For one thing you are missing that the market doesn't always drop.

Also, you never end up with losses because you sell all your losing shares before the end of the tax year.
Thanks. If I don’t prefer one fund over the other, and my goal is to stick to only 2 funds for this category (i.e., if both funds have a loss, I would only harvest loss out of one fund), then it makes sense to keep buying fund B, right?

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