TLH: What Winner to Sell to Use the Loss?

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historikerstreit
Posts: 20
Joined: Tue Oct 31, 2017 8:06 pm

TLH: What Winner to Sell to Use the Loss?

Post by historikerstreit » Tue Oct 08, 2019 7:00 pm

I am sure I am not the first Boglehead who has had a secret vice and is determined to reform. In my case, the dirty secret has been BRSIX (Bridgeway Ultra-Small Company Market), a microcap fund whose tax inefficiency has long bothered me. I recently realized that given its poor performance, I could sell at a loss and harvest the tax loss while rolling the proceeds into a correspondingly increased small-cap-value allocation with much more tax-efficient funds. (Lemons, meet lemonade.)

I will use some of the loss to offset gains as I rebalance out of the biggest current winner in my taxable account, IVV. But I will still have more tax loss available to offset gains. Given the long run-up in the market, and how long I have been investing in taxable, I've got gains across the board except for the BRSIX position I'll be liquidating.

How do forum members decide which winners to sell in this situation? I am tempted to focus on tax efficiency and sell some FSMAX (Fidelity Extended Market Index) to purchase VO (Vanguard Mid-Cap ETF) which seems very similar but without a history of distributing capital gains. Does that make sense? The FSMAX position is the least tax-efficient holding in my taxable account. Or should I be thinking about it differently?

Thanks!

bradpevans
Posts: 589
Joined: Sun Apr 08, 2018 1:09 pm

Re: TLH: What Winner to Sell to Use the Loss?

Post by bradpevans » Tue Oct 08, 2019 7:51 pm

historikerstreit wrote:
Tue Oct 08, 2019 7:00 pm
I am sure I am not the first Boglehead who has had a secret vice and is determined to reform. In my case, the dirty secret has been BRSIX (Bridgeway Ultra-Small Company Market), a microcap fund whose tax inefficiency has long bothered me. I recently realized that given its poor performance, I could sell at a loss and harvest the tax loss while rolling the proceeds into a correspondingly increased small-cap-value allocation with much more tax-efficient funds. (Lemons, meet lemonade.)

I will use some of the loss to offset gains as I rebalance out of the biggest current winner in my taxable account, IVV. But I will still have more tax loss available to offset gains. Given the long run-up in the market, and how long I have been investing in taxable, I've got gains across the board except for the BRSIX position I'll be liquidating.

How do forum members decide which winners to sell in this situation? I am tempted to focus on tax efficiency and sell some FSMAX (Fidelity Extended Market Index) to purchase VO (Vanguard Mid-Cap ETF) which seems very similar but without a history of distributing capital gains. Does that make sense? The FSMAX position is the least tax-efficient holding in my taxable account. Or should I be thinking about it differently?

Thanks!
You might be better off to offset income rather than gains....

rkhusky
Posts: 7356
Joined: Thu Aug 18, 2011 8:09 pm

Re: TLH: What Winner to Sell to Use the Loss?

Post by rkhusky » Tue Oct 08, 2019 7:52 pm

Most people like to use TLH proceeds to offset income and use their tax-advantaged accounts to rebalance. You can roll over the losses for years. But you do have offset any cap gains first, if there are any.

Topic Author
historikerstreit
Posts: 20
Joined: Tue Oct 31, 2017 8:06 pm

Re: TLH: What Winner to Sell to Use the Loss?

Post by historikerstreit » Tue Oct 08, 2019 8:15 pm

Thanks, in this case I want to shift away from the BRSIX entirely, which will leave me with much more loss than the $3K I can use each year to offset earned income. So I am trying to take advantage of the loss either to increase the tax-efficiency of my portfolio or perhaps step up cost basis by shifting appreciated shares into an approximately equivalent fund or ETF that won't run afoul of the wash-sale rules.

rkhusky
Posts: 7356
Joined: Thu Aug 18, 2011 8:09 pm

Re: TLH: What Winner to Sell to Use the Loss?

Post by rkhusky » Tue Oct 08, 2019 8:35 pm

There is no wash sale for gains, only losses.

If you will have more losses than you can possibly use for income, cleaning up your taxable portfolio makes sense. I would still keep some of the loss available for some special circumstance.

livesoft
Posts: 68112
Joined: Thu Mar 01, 2007 8:00 pm

Re: TLH: What Winner to Sell to Use the Loss?

Post by livesoft » Tue Oct 08, 2019 8:42 pm

historikerstreit wrote:
Tue Oct 08, 2019 8:15 pm
Thanks, in this case I want to shift away from the BRSIX entirely, which will leave me with much more loss than the $3K I can use each year to offset earned income. So I am trying to take advantage of the loss either to increase the tax-efficiency of my portfolio or perhaps step up cost basis by shifting appreciated shares into an approximately equivalent fund or ETF that won't run afoul of the wash-sale rules.
I carryover losses to offset income in future years, but improving tax efficiency is also good. You will need to list the worst offenders of tax-efficiency in your portfolio for us to comment on that. You have mentioned FSMAX, so it is certainly OK with me to dump it.
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