Avoid unqualified dividends by selling a lot too quickly when TLH.

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EdLaFave
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Avoid unqualified dividends by selling a lot too quickly when TLH.

Post by EdLaFave » Mon Aug 13, 2018 10:30 am

I'd like some help understanding exactly how to calculate important dates associated with Tax Loss Harvesting and avoiding unqualified dividends in the process. Suppose the following:

1. You were planning to Tax Loss Harvest by placing an order to exchange an old Vanguard mutual fund for a new one before 4 PM on 8/13/2018.
2. The new fund declines in value.
3. Based on last year, you expect the new fund's record date to be sometime around 9/18/2018.
4. You want to exchange back into the old fund ASAP (31 days after the purchase of the new fund) and before the new fund distributes dividends/gains, which would result in the distribution being 100% unqualified since you prefer to sell before the full 61 days pass.

So my questions are:

1. How exactly do you calculate the important dates?
2. When is the first day (before 4 PM) when you can place the order to switch back to the old fund without triggering a wash sale? Is it 9/13/2018 before 4 PM?
3. When is the last day (before 4 PM) when you can place the order to switch back to the old fund without receiving a distribution from the new fund, which would result in it being 100% unqualified since the new fund's lot was held less than 61 days? Is it 9/17/2018 before 4 PM?
4. When is the record date announced? It seems to be shrouded in secrecy.
Last edited by EdLaFave on Mon Aug 13, 2018 9:27 pm, edited 1 time in total.

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goingup
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Re: Avoid unqualified dividends by selling a lot too quickly when TLH.

Post by goingup » Mon Aug 13, 2018 11:25 am

I'll give your thread a bump for more visibility. I'm not an expert but I've done a few TLHs.

Turn off dividend reinvestment in both your old fund and the new fund. Take dividends in cash. There will be no issue about qualified/unqualified.

From experience, don't count on being able to do a round trip back into your original fund unless you're indifferent to paying ST capital gains. You have to be willing to hold your TLH partner forever.

I can't answer your questions about dates. I never tried to play it so precisely as to worry about that.

EdLaFave
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Re: Avoid unqualified dividends by selling a lot too quickly when TLH.

Post by EdLaFave » Mon Aug 13, 2018 6:49 pm

goingup wrote:
Mon Aug 13, 2018 11:25 am
Turn off dividend reinvestment in both your old fund and the new fund. Take dividends in cash. There will be no issue about qualified/unqualified.

From experience, don't count on being able to do a round trip back into your original fund unless you're indifferent to paying ST capital gains. You have to be willing to hold your TLH partner forever.

I can't answer your questions about dates. I never tried to play it so precisely as to worry about that.
I agree with everything except I'm reasonably sure that if you receive a distribution on a lot that you sold less than 61 days after you purchased it, then the distribution will be considered 100% unqualified. viewtopic.php?t=233406 Am I missing something?

I've never had to be this precise either, just trying to understand exactly how it works...thanks for the bump.

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House Blend
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Re: Avoid unqualified dividends by selling a lot too quickly when TLH.

Post by House Blend » Thu Aug 16, 2018 1:00 pm

EdLaFave wrote:
Mon Aug 13, 2018 10:30 am
1. How exactly do you calculate the important dates?
2. When is the first day (before 4 PM) when you can place the order to switch back to the old fund without triggering a wash sale? Is it 9/13/2018 before 4 PM?

Yes, if you sold at a loss on 8/13, you can buy back on 9/13 without creating a wash.

3. When is the last day (before 4 PM) when you can place the order to switch back to the old fund without receiving a distribution from the new fund, which would result in it being 100% unqualified since the new fund's lot was held less than 61 days? Is it 9/17/2018 before 4 PM?

I've never sold a VG mutual fund on its record date, but would assume that you would not receive a dividend in that case. Sell the day before if you want to be safe.

4. When is the record date announced? It seems to be shrouded in secrecy.
Vanguard will probably announce the Q3 dividend dates in early September.
As you said, holding shares for 61 days is the criterion for keeping your qualified dividends qualified. So if you bought Vanguard Mutual Fund Y on 8/13 with the proceeds from your sale, then selling Fund Y on 10/13 or later would be "safe", regardless of which date in September its dividend occurred.

As long as 9/13 is before the record date for Q3 dividends, you should be ok, but I would only sell if I could sell at a loss. If not I would continue to hold at least until 10/13. After that, I would not sell except to take a loss, or to make a donation, or because I needed the cash.

EdLaFave
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Re: Avoid unqualified dividends by selling a lot too quickly when TLH.

Post by EdLaFave » Tue Sep 11, 2018 9:54 pm

House Blend wrote:
Thu Aug 16, 2018 1:00 pm
As long as 9/13 is before the record date for Q3 dividends, you should be ok, but I would only sell if I could sell at a loss.
Thanks House Blend.

This Vanguard page lists the upcoming dividend schedule and uses the term declaration date. This Vanguard page lists historical dividend dates and uses the terms record date, reinvest date, and payable date. I'm confused about what exactly these terms mean.

I suppose my main question is: does one of these dates represent the last day I can place a sell order (before 4pm) and NOT receive the dividend?

More generally I'd like to know exactly what those four terms mean and how those dates impact whether or not buyers/sellers will receive the dividend if they place a buy/sell order before 4 pm of each date?

I tried to google this, but I'm reading conflicting/confusing information. For example, this Fidelity page says the declaration date is the same thing as the reinvest date. I used an internet archive tool to view an older version of Vanguard's upcoming dividends schedule page and it seemed to indicate the declaration date was the same thing as the record date. However, this other site says the declaration date is just when the other dates are announced and it also says the reinvest date is "two trading days before the record date," which seems to be clearly incorrect based on the Vanguard page that lists historical dividend dates.

My best guess is that the declaration date is the same thing as the record date and it has the following implications (please reply if anybody knows for sure):

1. Placing a sell order the day before the record date (before 4pm) means you will NOT receive the dividend.
2. Placing a sell order the day of or after the record date means you will receive the dividend.
3. Placing a buy order the day before the record date (before 4pm) means you will receive the dividend.
4. Placing a buy order the day of or after the record date means you will NOT receive the dividend.

jclear
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Re: Avoid unqualified dividends by selling a lot too quickly when TLH.

Post by jclear » Wed Sep 12, 2018 3:39 am

EdLaFave wrote:
Mon Aug 13, 2018 10:30 am
4. You want to exchange back into the old fund ASAP (31 days after the purchase of the new fund) and before the new fund distributes dividends/gains, which would result in the distribution being 100% unqualified since you prefer to sell before the full 61 days pass.
When investing in mutual funds, the 61 day window only applies to wash sales on the capital gains you get from buying/selling the fund. Reinvesting a distribution of any kind is a buy. Whether a dividend distribution of a mutual fund is qualified or nonqualified has nothing to do with when you buy/sell; it has to do with the buying/selling of underlying securities by the fund. Some index funds have 100% qualified dividends year after year, even if you got a dividend distribution by holding some shares of the mutual fund for only a few days. (You’re worrying about nothing.) [You’re right, below. I checked with Fidelity. Somehow I never have this issue because I never try to dash in and out.]
Last edited by jclear on Wed Sep 12, 2018 8:10 am, edited 1 time in total.

EdLaFave
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Re: Avoid unqualified dividends by selling a lot too quickly when TLH.

Post by EdLaFave » Wed Sep 12, 2018 7:53 am

jclear wrote:
Wed Sep 12, 2018 3:39 am
Whether a dividend distribution of a mutual fund is qualified or nonqualified has nothing to do with when you buy/sell; it has to do with the buying/selling of underlying securities by the fund...(You’re worrying about nothing.)
I believe you are wrong. Among other sources, the boglehead wiki states:
Holding mutual fund shares less than 61 days. You should also be aware that any dividend you receive on mutual fund shares held less than 61 days is a non-qualified dividend, even if the mutual fund reports that amount to you as a qualified dividend. You don't have to buy the shares 61 days before the dividend is paid, but the total amount of time you hold the shares (including time before and after the dividend) has to be at least 61 days.

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House Blend
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Re: Avoid unqualified dividends by selling a lot too quickly when TLH.

Post by House Blend » Wed Sep 12, 2018 9:19 am

EdLaFave wrote:
Tue Sep 11, 2018 9:54 pm
House Blend wrote:
Thu Aug 16, 2018 1:00 pm
As long as 9/13 is before the record date for Q3 dividends, you should be ok, but I would only sell if I could sell at a loss.
Thanks House Blend.

This Vanguard page lists the upcoming dividend schedule and uses the term declaration date. This Vanguard page lists historical dividend dates and uses the terms record date, reinvest date, and payable date. I'm confused about what exactly these terms mean.

I suppose my main question is: does one of these dates represent the last day I can place a sell order (before 4pm) and NOT receive the dividend?

More generally I'd like to know exactly what those four terms mean and how those dates impact whether or not buyers/sellers will receive the dividend if they place a buy/sell order before 4 pm of each date?
I believe that the terminology that Vanguard uses for its mutual fund distribution dates are a bit non-standard.

Let's take VTSAX as an example. They've announced 9/26 as its declaration date. What that means in practice is that very late on 9/26 (many hours after market close), they will post the distribution amount (dollars per share), along with the record date, reinvest date, and payable date.

Those dates will be 9/26, 9/27, and 9/28, respectively.

As I mentioned earlier, I *believe* that if you sell on 9/26, you will not get the dividend, but I have no first-hand experience with this. I do have first-hand experience with buying on the reinvest date (in this case 9/27) and know that those shares will not get the dividend. If you don't auto-reinvest, the dividend distribution transfer will be initiated on 9/28. In my experience with my bank, I can expect that the dividend will be credited to my bank account on the next banking day, in this case 10/1.

None of the above comments apply to their ETFs.

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