Tax Loss Harvesting - Is it worth it?

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livesoft
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Re: Tax Loss Harvesting - Is it worth it?

Post by livesoft » Mon Jan 02, 2017 2:30 pm

ff4930 wrote:Can someone speak of TLH upon tax return season? How does this work? Is it a painful process or is just a figure in a textbox on our tax returns?
You import your 1099-B into your tax software and you are done. What could be more simple?!

Of course, you might want to read the instructions to the IRS forms and not just be a click monkey.

Here's what it looks like in this post: viewtopic.php?p=2773041#p2773041
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Re: Tax Loss Harvesting - Is it worth it?

Post by grabiner » Mon Jan 02, 2017 3:53 pm

livesoft wrote:
ff4930 wrote:Can someone speak of TLH upon tax return season? How does this work? Is it a painful process or is just a figure in a textbox on our tax returns?
You import your 1099-B into your tax software and you are done. What could be more simple?!

Of course, you might want to read the instructions to the IRS forms and not just be a click monkey.
In particular, if you have non-covered shares (bought in 2011 or earlier), your brokerage is not required to report a basis to the IRS at all, and what it reports to you may not be correct even to the best of the brokerage's knowledge. I harvested some mutual-fund shares bought in 2010 in January. I used specific identification (because I have shares of the same fund bought in 2002-2004 which have large gains), but I expect Vanguard to incorrectly report an average-cost basis. Therefore, I will have to make a manual entry in my tax software for the actual purchase price, which I have in my own records, and which I indicated to Vanguard when I sold the shares; the software will then transfer that entry to Form 8949.
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Re: Tax Loss Harvesting - Is it worth it?

Post by Toons » Mon Jan 02, 2017 3:56 pm

I wanted to try harvesting this year ..but....
There was nothing to "harvest"
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Re: Tax Loss Harvesting - Is it worth it?

Post by Artsdoctor » Mon Jan 02, 2017 4:05 pm

livesoft wrote:
ff4930 wrote:Can someone speak of TLH upon tax return season? How does this work? Is it a painful process or is just a figure in a textbox on our tax returns?
You import your 1099-B into your tax software and you are done. What could be more simple?!

Of course, you might want to read the instructions to the IRS forms and not just be a click monkey.

Here's what it looks like in this post: viewtopic.php?p=2773041#p2773041
Not so fast.

Like Grabiner mentioned, this only works for covered shares.

There will come a point when you may be selling non-covered shares at a loss (think bond fund shares), and you'll need to perform your own calculations using your own lots. This is done by hand.

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Re: Tax Loss Harvesting - Is it worth it?

Post by livesoft » Mon Jan 02, 2017 4:44 pm

Artsdoctor wrote:Not so fast.

Like Grabiner mentioned, this only works for covered shares.

There will come a point when you may be selling non-covered shares at a loss (think bond fund shares), and you'll need to perform your own calculations using your own lots. This is done by hand.
Show me someone who tax-loss harvested non-covered shares and I will show you someone who wouldn't ask the question in the first place. :)

That's because if they didn't have cost basis, then how would they know they were selling at a loss?
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Re: Tax Loss Harvesting - Is it worth it?

Post by vencat » Mon Jan 02, 2017 5:09 pm

The Vanguard article https://personal.vanguard.com/pdf/s802.pdf mentions the following:
"However,since future portfolio positions and tax rates are unknown, it is generally not recommended to harvest losses in excess of current-year gains plus an amount to offset ordinary income."

Can someone clarify? I always thought it was good to accumulate as much losses as possible for future use. I have harvested whenever possible and have over $150,000/- in losses.

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Re: Tax Loss Harvesting - Is it worth it?

Post by island » Mon Jan 02, 2017 5:32 pm

livesoft wrote:
Artsdoctor wrote:Not so fast.

Like Grabiner mentioned, this only works for covered shares.

There will come a point when you may be selling non-covered shares at a loss (think bond fund shares), and you'll need to perform your own calculations using your own lots. This is done by hand.
Show me someone who tax-loss harvested non-covered shares and I will show you someone who wouldn't ask the question in the first place. :)

That's because if they didn't have cost basis, then how would they know they were selling at a loss?
Ah, wrong again. I have non- covered shares, tax lost harvested for the first time this year. I figured out basis so I'd know which shares to sell at a loss, but I still have concerns about doing it correctly on my taxes and have expressed that in this thread and others.
Just because some of us fools didn't know about TLH in the past, doesn't mean we're incapable of catching on. :D But I won't know how painful a process it is until I start doing my taxes. :confused
Last edited by island on Mon Jan 02, 2017 5:38 pm, edited 2 times in total.

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Re: Tax Loss Harvesting - Is it worth it?

Post by livesoft » Mon Jan 02, 2017 5:38 pm

Great! So you want to know how to fill out your tax returns which was the question?

"Is it a painful process or is just a figure in a textbox on our tax returns?"
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Re: Tax Loss Harvesting - Is it worth it?

Post by Artsdoctor » Mon Jan 02, 2017 6:46 pm

livesoft wrote:
Artsdoctor wrote:Not so fast.

Like Grabiner mentioned, this only works for covered shares.

There will come a point when you may be selling non-covered shares at a loss (think bond fund shares), and you'll need to perform your own calculations using your own lots. This is done by hand.
Show me someone who tax-loss harvested non-covered shares and I will show you someone who wouldn't ask the question in the first place. :)

That's because if they didn't have cost basis, then how would they know they were selling at a loss?
In a rising interest rate environment, one would expect NAVs to decrease. This past year was an opportunity to TLH covered shares in my muni bond fund. However, I'm starting to see a few NAV purchase prices in 2010 which are only about 3% less than the current NAV. Once the price dips down to those 2010 prices, I will TLH (noncovered shares).

We've had a very long bull market in bonds and interest rates have been low for a lot longer than most expected. But I suspect that there are lots purchased before 2012 that will be ripe for TLHing within the next year.

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Re: Tax Loss Harvesting - Is it worth it?

Post by Earl Lemongrab » Mon Jan 02, 2017 11:57 pm

ff4930 wrote:Can someone speak of TLH upon tax return season? How does this work? Is it a painful process or is just a figure in a textbox on our tax returns?
You put your 1099 figures into the tax return. Schedule D if doing by hand, or into your tax software. Follow the instructions and you get your capital gains or losses.

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Re: Tax Loss Harvesting - Is it worth it?

Post by privatefarmer » Tue Jan 03, 2017 2:18 am

dumb question, I apologize, but how exactly do we "carry over" an investment loss for TLH from previous years? I use taxact but do not remember it "asking" me if I had investment losses from prior years. and how/who tracks all this? how does the IRS know when we've "exhausted" all our losses from previous years? I have 18k in harvested losses that I can use over the next 6 years. thanks!

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Re: Tax Loss Harvesting - Is it worth it?

Post by Doc » Tue Jan 03, 2017 8:36 am

privatefarmer wrote:dumb question, I apologize, but how exactly do we "carry over" an investment loss for TLH from previous years? I use taxact but do not remember it "asking" me if I had investment losses from prior years. and how/who tracks all this? how does the IRS know when we've "exhausted" all our losses from previous years? I have 18k in harvested losses that I can use over the next 6 years. thanks!
TurboTax imports from prior year. I would assume Taxact is same.
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Re: Tax Loss Harvesting - Is it worth it?

Post by livesoft » Tue Jan 03, 2017 8:59 am

privatefarmer wrote:dumb question, I apologize, but how exactly do we "carry over" an investment loss for TLH from previous years? I use taxact but do not remember it "asking" me if I had investment losses from prior years. and how/who tracks all this? how does the IRS know when we've "exhausted" all our losses from previous years? I have 18k in harvested losses that I can use over the next 6 years. thanks!
This is tracked on your tax returns. But the IRS has all your tax returns as well, so it knows, too. Look at Schedule D.

Hint: You have to do some math for the carryover from numbers on Schedule D, but tax software is capable of doing math, too.
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Is Tax Loss Harvesting Worth the Hassle?

Post by DCinvestor » Tue Jan 03, 2017 11:35 am

[Thread merged into here, see below. --admin LadyGeek]

Hi Bogleheads,

For context, my taxable account equity portfolio consists of 3 funds:
  • Vanguard Total Stock Market Index Admiral (40%)
  • Vanguard Total International Stock Market Index Admiral (40%)
  • Vanguard Small-Cap Value Index Fund Admiral (20%)
My holdings in these funds are not too big right now (currently in the form of mutual funds) and I plan to contribute additional money each month, re-balancing through new contributions.

I've got three questions, all related to tax loss harvesting. Please feel free to answer some or all of them with your thoughts:

1) Is tax loss harvesting worth the hassle? I know some of you will say "what hassle?"...but anything which requires me to sell seems like a hassle and has the potential to take me off course. I am planning to hold my funds until the end of time (or retirement- whichever comes first). I would be curious to hear from the buy-and-holders on this one- do you bother with tax loss harvesting?

2) Are ETF's better for tax loss harvesting than mutual funds? It seems like being able to sell at a moment's notice or with a limit order allows for more precision than mutual fund transactions.

3) Any recommendations for TLH pairs? I've read that your TLH pairs need to be funds you'd basically want to hold forever. I am thinking VV for Total Stock Market, VEU for Total International Stock Market, and VB for Small-Cap Value.

Thanks in advance for your thoughts!
Last edited by DCinvestor on Tue Jan 03, 2017 12:06 pm, edited 1 time in total.

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Re: Is Tax Loss Harvesting Worth the Hassle?

Post by goingup » Tue Jan 03, 2017 11:45 am

I have found it useful though it is a rare occurrence. There were opportunities in 2008-9. In 2015 I harvested $12K in International losses. In 2016 was able to harvest $8K in muni fund losses.

Do you have a taxable account? Do you have any losses?

I think it's worthwhile but is a relatively minor element in the big picture of investing.

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Re: Is Tax Loss Harvesting Worth the Hassle?

Post by Da5id » Tue Jan 03, 2017 11:50 am

DCinvestor wrote: 1) Is tax loss harvesting worth the hassle? I know some of you will say "what hassle?"...but anything which requires me to sell seems like a hassle and has the potential to take me off course. I am planning to hold my funds until the end of time (or retirement- whichever comes first). I would be curious to hear from the buy-and-holders on this one- do you bother with tax loss harvesting?
Whether it is worth the "hassle" depends entirely on the amount of money involved, and how significant that amount is to you. If you will save $100 in taxes this year, is it worth it? Not to me. $1000 or more, sure. Not sure where the cut off would be. But the hassle really isn't all that big far as I can see...

I am a buy and holder. Haven't had much occasion to TLH over the past 8 years, but actually did some on my bond and international funds in 2016.

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Re: Is Tax Loss Harvesting Worth the Hassle?

Post by BolderBoy » Tue Jan 03, 2017 11:55 am

DCinvestor wrote:1) Is tax loss harvesting worth the hassle? I know some of you will say "what hassle?"...but anything which requires me to sell seems like a hassle and has the potential to take me off course. I am planning to hold my funds until the end of time (or retirement- whichever comes first). I would be curious to hear from the buy-and-holders on this one- do you bother with tax loss harvesting?
First, TLH only applies to non-retirement accounts. Second, when you TLH you oughtn't be "selling", but instead "exchanging", so as not to be out of the market. Beyond that, yes - it is worth doing whenever the opportunity presents. Like the previous poster, I TLH'd my muni bond fund and 32 days later got back into it. Doing the TLH allowed me to bump up my Roth conversion for 2016 by another $3000.
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Re: Is Tax Loss Harvesting Worth the Hassle?

Post by mhalley » Tue Jan 03, 2017 12:20 pm

Kitces has a good article on the subject. He gives several examples, discusses the % gain etc.

"The bottom line, though, is simply this: tax loss harvesting (TLH) does have some economic benefit over time, although it’s driven not by the outright savings (typically measured by “tax alpha”), but instead by the economic value of tax deferral, which leads to modest but non-trivial economic benefits over time. For those who may experience tax bracket changes, the benefits can be significant amplified – for better or worse – and in fact, the impact of tax bracket arbitrage can be many times more significant than the underlying benefits of tax deferral itself. As a result, it’s crucial to focus not just on the tax deferral value of loss harvesting, but also the potential tax bracket impacts… and to the extent any anticipated tax bracket changes are favorable, and there are gains to offset with the losses in the first place, harvest as much as possible, maximizing the opportunity for each contribution, each investment/asset class being held, and by “checking” for loss harvesting opportunities as often as possible!"


https://www.kitces.com/blog/evaluating- ... arvesting/

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Re: Tax Loss Harvesting - Is it worth it?

Post by House Blend » Tue Jan 03, 2017 12:47 pm

Artsdoctor wrote:
livesoft wrote:
ff4930 wrote:Can someone speak of TLH upon tax return season? How does this work? Is it a painful process or is just a figure in a textbox on our tax returns?
You import your 1099-B into your tax software and you are done. What could be more simple?!

Of course, you might want to read the instructions to the IRS forms and not just be a click monkey.

Here's what it looks like in this post: viewtopic.php?p=2773041#p2773041
Not so fast.

Like Grabiner mentioned, this only works for covered shares.

There will come a point when you may be selling non-covered shares at a loss (think bond fund shares), and you'll need to perform your own calculations using your own lots. This is done by hand.
I agree that you can't rely on your 1099-B and tax software to cover all cases.

Another example: you have a wash sale in which the replacement shares were purchased in some account elsewhere (possibly an IRA).

Or if the Elsewhere Account is taxable and you subsequently sell the (covered) replacement shares with the altered basis.

That said, new-ish investors that only own covered shares, all in one taxable account, and that have a basic understanding of the rules, are likely to do fine with their tax software and 1099-Bs when they TLH. Typically they won't even need to file Form 8949 at all.

But given that they want to engage in TLH, I would still recommend that they track cost basis on their own and learn enough so that they can spot when their software or brokerage has made a mistake.

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Re: Is Tax Loss Harvesting Worth the Hassle?

Post by triceratop » Tue Jan 03, 2017 12:49 pm

Also on the front page of Bogleheads.org: viewtopic.php?f=10&t=206806&newpost=3176031
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Re: Tax Loss Harvesting - Is it worth it?

Post by bradshaw1965 » Tue Jan 03, 2017 12:54 pm

The behavioral benefit of TLH during the crisis when my brain was screaming "do something" was a small but useful benefit.

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Re: Is Tax Loss Harvesting Worth the Hassle?

Post by livesoft » Tue Jan 03, 2017 12:57 pm

DCinvestor wrote:1) Is tax loss harvesting worth the hassle? I know some of you will say "what hassle?"...but anything which requires me to sell seems like a hassle and has the potential to take me off course. I am planning to hold my funds until the end of time (or retirement- whichever comes first). I would be curious to hear from the buy-and-holders on this one- do you bother with tax loss harvesting?
If it is a hassle for you to sell at a loss, then it is probably too much hassle, but you have set the definition-of-hassle bar very very low.

Is it a hassle for you to rebalance your portfolio?

Is it a hassle for you to reinvest dividends?

2) Are ETF's better for tax loss harvesting than mutual funds? It seems like being able to sell at a moment's notice or with a limit order allows for more precision than mutual fund transactions.
I don't think it matters, but I find more precision with ETFs because I know the exact prices I will buy and sell at. With mutual funds you are only guessing what the end-of-day NAV is. Nevertheless, I own both mutual funds and ETFs myself and I am not hassled by them at all.
3) Any recommendations for TLH pairs? I've read that your TLH pairs need to be funds you'd basically want to hold forever. I am thinking VV for Total Stock Market, VEU for Total International Stock Market, and VB for Small-Cap Value.
Pairs are easy:

VV -> VOO, IVV, SPY, VTI, and many others.
VEU -> VXUS, IXUS, VEA, and many others
VBR -> IJS before VB, but then VB.

So your pairs are fine.

Thanks in advance for your thoughts!
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Re: Tax Loss Harvesting - Is it worth it?

Post by zeugmite » Tue Jan 03, 2017 1:12 pm

Is there a list of ETF's and their desired TLH pair somewhere? For me, I would like to do TLH but it's always the question of not being able to find the right pair and then the trading costs for some ETF's.

If you don't have trading costs, I guess you can just wait 30 days if it's unlikely for asset prices to change by more than your tax rate in 30 days.

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Re: Tax Loss Harvesting - Is it worth it?

Post by 2015 » Tue Jan 03, 2017 1:15 pm

privatefarmer wrote:dumb question, I apologize, but how exactly do we "carry over" an investment loss for TLH from previous years? I use taxact but do not remember it "asking" me if I had investment losses from prior years. and how/who tracks all this? how does the IRS know when we've "exhausted" all our losses from previous years? I have 18k in harvested losses that I can use over the next 6 years. thanks!
It's not a dumb question. When I first took over taxes from my accountant by using TA, I input the carryover losses from the very last taxes prepared for me by my accountant into TA's losses screen (sorry I can't remember the exact screen, but the screen always shows up when doing taxes using TA). Each year thereafter, the carryover losses automatically show up after importing the previous year's returns filed using TA.

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Re: Tax Loss Harvesting - Is it worth it?

Post by cookymonster » Tue Jan 03, 2017 1:17 pm

zeugmite wrote:Is there a list of ETF's and their desired TLH pair somewhere? For me, I would like to do TLH but it's always the question of not being able to find the right pair and then the trading costs for some ETF's.

If you don't have trading costs, I guess you can just wait 30 days if it's unlikely for asset prices to change by more than your tax rate in 30 days.
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Re: Tax Loss Harvesting - Is it worth it?

Post by itstoomuch » Tue Jan 03, 2017 1:31 pm

Yes, it is worth to TLH (as long as the TLH is bigger than the tax account's added fee for the extra paper work).
I find that if I take a loss, I rather move on to something else.
I try mightily acquire and hold winners rather than losers. :oops: :annoyed :mrgreen:
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Re: Tax Loss Harvesting - Is it worth it?

Post by Lieutenant.Columbo » Tue Jan 03, 2017 1:39 pm

itstoomuch wrote:Yes, it is worth to TLH (as long as the TLH is bigger than the tax account's added fee for the extra paper work).
I find that if I take a loss, I rather move on to something else.
I try mightily acquire and hold winners rather than losers. :oops: :annoyed :mrgreen:
YMMV :beer
you use TLH for rebalancing purposes :wink:
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Re: Tax Loss Harvesting - Is it worth it?

Post by House Blend » Tue Jan 03, 2017 2:17 pm

Lieutenant.Columbo wrote:
itstoomuch wrote:Yes, it is worth to TLH (as long as the TLH is bigger than the tax account's added fee for the extra paper work).
I find that if I take a loss, I rather move on to something else.
I try mightily acquire and hold winners rather than losers. :oops: :annoyed :mrgreen:
YMMV :beer
you use TLH for rebalancing purposes :wink:
This reminds me of another reason why it is useful for funds to have TLH partners--having them preserves your ability to quickly rebalance.

That is, if you harvest from Fund A to Fund B in Asset Class X, you can rebalance at the same time (if necessary) by buying more of Fund B, while it is on sale.

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Re: Is Tax Loss Harvesting Worth the Hassle?

Post by jebmke » Tue Jan 03, 2017 3:39 pm

Tax loss harvesting is less hassle than downloading a monthly or quarterly statement. Once you have your pairs decided it is a click to exchange from one to the other. Not convinced that funds have any disadvantage over ETFs. Have done both.
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Re: Is Tax Loss Harvesting Worth the Hassle?

Post by Da5id » Tue Jan 03, 2017 3:55 pm

jebmke wrote:Tax loss harvesting is less hassle than downloading a monthly or quarterly statement. Once you have your pairs decided it is a click to exchange from one to the other. Not convinced that funds have any disadvantage over ETFs. Have done both.
If you have automated dividend reinvesting turned on, somewhat more hassle than that to avoid wash sales midn you.

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Re: Tax Loss Harvesting - Is it worth it?

Post by dratkinson » Tue Jan 03, 2017 4:32 pm

bradshaw1965 wrote:The behavioral benefit of TLH during the crisis when my brain was screaming "do something" was a small but useful benefit.
+1

A TLH's biggest benefit may be that it teaches us not to fear a market decline. Why? Because it's hard to notice your investments are losing money when you are consciously looking for a larger TLH.

Not certain of the term given to this behavioral finance error. Purposeful distraction? (If that is a real thing.) "Here, boy, go get the stick." And before you know it, the market crisis has passed, your investments are again positive, and you have a tax deduction. "Good, boy."
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Re: Tax Loss Harvesting - Is it worth it?

Post by LadyGeek » Tue Jan 03, 2017 5:03 pm

FYI - I merged DCinvestor's question into a similar discussion, which is in the Investing - Theory, News & General forum (general investing).
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Re: Tax Loss Harvesting - Is it worth it?

Post by Artsdoctor » Tue Jan 03, 2017 5:56 pm

dratkinson wrote:
bradshaw1965 wrote:The behavioral benefit of TLH during the crisis when my brain was screaming "do something" was a small but useful benefit.
+1

A TLH's biggest benefit may be that it teaches us not to fear a market decline. Why? Because it's hard to notice your investments are losing money when you are consciously looking for a larger TLH.

Not certain of the term given to this behavioral finance error. Purposeful distraction? (If that is a real thing.) "Here, boy, go get the stick." And before you know it, the market crisis has passed, your investments are again positive, and you have a tax deduction. "Good, boy."
Actually, this is a very good point. It can be gut-wrenching to see your portfolio shrink during a severe bear market. When you're tax-loss harvesting, you are accumulating carryover losses which will come in handy later. The conventional wisdom, strictly speaking, would be to "don't just do something, stand there!" But TLH has several very distinct advantages, both concrete and psychological, as you point out (mostly the former, but the latter is a plus).

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Re: Tax Loss Harvesting - Is it worth it?

Post by Flobes » Tue Jan 03, 2017 6:23 pm

Duplicate post: sorry
Last edited by Flobes on Tue Jan 03, 2017 6:27 pm, edited 1 time in total.

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Re: Tax Loss Harvesting - Is it worth it?

Post by Flobes » Tue Jan 03, 2017 6:25 pm

Even at lower income levels, tax-loss harvesting can be mighty useful. Starting a tax return with a $3000 loss helps maximize AGI-based strategies, like qualifying for Savers Credit and garnering ACA subsidies with cost-sharing benefits. This can translate to thousands of dollars.

My 2016 tax return will have a $3000 carry-forward loss, Savers Credit, max ACA benefits, with some headspace for some tax-free Roth conversion. (Ditto as 2015 and 2014 filed returns). Yum!

As others have said, tax-loss harvesting is easy once you learn a few simple rules. TaxAct tracks it from year to year, but so do I.

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Re: Tax Loss Harvesting - Is it worth it?

Post by Earl Lemongrab » Tue Jan 03, 2017 7:37 pm

zeugmite wrote:Is there a list of ETF's and their desired TLH pair somewhere?
People don't always agree on which pairs are legit. I'm pretty aggressive, others much more cautious. I would not have any problem swapping two S&P 500 ETFs from different fund companies, for instance. Others would blanch at that idea.

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Re: Tax Loss Harvesting - Is it worth it?

Post by FIby45 » Wed Nov 06, 2019 8:57 pm

Random Walker wrote:
Fri Dec 30, 2016 5:00 pm
From reading the Berkin et al papers on this site, I believe TLH done right can yield 0.5-0.7% per year. TLH needs to be done on an individual lot basis (HIFO I believe) and done throughout the year. FWIW, it was TLH that helped me decide to go the advisor route. I felt that over time TLH would just about cover the AUM fee. Someone needs to decide when the losses are big enough to warrant the costs of TLH. My advisor makes these decisions.

Dave
Is 0.5% really all it saves? you are recognizing significant paper losses over time w no real loss in value assuming buying into similar index. It seems like doing this properly could be a massive savings over time.

Maybe I am not understanding

Random Walker
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Re: Tax Loss Harvesting - Is it worth it?

Post by Random Walker » Thu Nov 07, 2019 9:39 am

FIby45 wrote:
Wed Nov 06, 2019 8:57 pm
Random Walker wrote:
Fri Dec 30, 2016 5:00 pm
From reading the Berkin et al papers on this site, I believe TLH done right can yield 0.5-0.7% per year. TLH needs to be done on an individual lot basis (HIFO I believe) and done throughout the year. FWIW, it was TLH that helped me decide to go the advisor route. I felt that over time TLH would just about cover the AUM fee. Someone needs to decide when the losses are big enough to warrant the costs of TLH. My advisor makes these decisions.

Dave
Is 0.5% really all it saves? you are recognizing significant paper losses over time w no real loss in value assuming buying into similar index. It seems like doing this properly could be a massive savings over time.

Maybe I am not understanding
At limits of my understanding too. First 0.5-0.7% annualized is significant, especially on a discussion board where we argue over expense ratio differences of 0.2%. Secondly, when we take a loss, we are buying again at a lower overall cost basis. Ultimately when we sell, there is a big tax to pay on a lower cost basis. So we are effectively delaying the tax. So perhaps the advantage overall is less than initial appearance.

Dave

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Richard1580
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Re: Tax Loss Harvesting - Is it worth it?

Post by Richard1580 » Thu Nov 07, 2019 12:28 pm

Tax loss harvesting is simply a means of turning lemons into lemonade. The preferred outcome is to never have capital losses, either real or theoretical, but that is not realistic.

At its core TLH is simply a means of delaying paying capital gains taxes on an investment. If you have a paper loss in IndexA and exchange it for IndexB (similar but not identical, so your AA remains unchanged), you can write off up to $3,000 in income, however you have effectively lowered your cost basis, meaning when you do go to sell IndexB, you will be paying capital gains tax (15%) on the $3,000 you had previously written off.

If you were in the 22% tax bracket, you saved $660 in taxes in the year you took the loss, but you will be paying $450 in additional capital gains tax in the year you eventually sell IndexB, due to the lower cost basis. (Obviously this is also dependent on your tax bracket – if you are in the 12% tax bracket, you pay no capital gains.)

A greater advantage comes if you can TLH an asset that you never plan on selling at a gain and use the loss to offset capital gains you would otherwise have to pay tax on. If you hold that asset until death, then your heirs inherit it at the stepped-up cost basis and no tax is ever paid (other than estate taxes).

It can also be very useful when rebalancing. I was able to use TLH at the end of last year when the market tanked to make some major adjustments to the holdings in my AA. As a result, what would have been a five-figure capital gain was reduced to four-figures.

Tax loss harvesting has its uses, but I think its benefits are often exaggerated.

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Re: Tax Loss Harvesting - Is it worth it?

Post by dratkinson » Thu Nov 07, 2019 5:40 pm

Richard1580 wrote:
Thu Nov 07, 2019 12:28 pm
...
It can also be very useful when rebalancing. I was able to use TLH at the end of last year when the market tanked to make some major adjustments to the holdings in my AA. As a result, what would have been a five-figure capital gain was reduced to four-figures.

Tax loss harvesting has its uses, but I think its benefits are often exaggerated.
N.B. In the year harvested, capital losses (ST+LT total)
--offset capital gains (ST+LT total) dollar-for-dollar,
--then any remainder offsets $3K of ordinary income in the same year.
--Any remainder carries forward to offset ordinary income at $3K/yr.


Student exercise. There are lots of rules associated with TLHing that can result in minor gotchas if done wrong, but nothing too critical---more like touching a hot horseshoe and we quickly learn not to do that again. And we can recover from most TLH gotchas by additional learning and a second TLH.

I've found it helpful to create/use a "transactions checklist to avoid gotchas" that reminds me of all of the requirements associated with any transaction (buying, selling/TLHing): IRS requirements (holding period requirements (LTCG, QDI,TE dividends (monthly/daily accrual),...), reinvested distributions in family accounts,...), fund family requirements (admiral shares limit, frequent trading policy, daily transaction limit,...), banking requirements (account limits to avoid fees, transactions with fees,...), ACH requirements (processing time, limits,...). I've previously posted my transactions checklist.

Bottom line. Try a few small TLHs just to learn the mechanism and create your own "transactions checklist to avoid gotchas".
--Your first small TLH will have a seemingly steep learning curve. (Many request a forum review before executing.)
--Your second small TLH will go more smoothly.
--You'll be an expert by your 3rd small TLH.

Then you can decide if future TLHing is worth your effort. (I believe... a large TLH, offsetting a large CG resulting from rebalancing, when our heirs get a stepped up cost basis ...is worth it.)


Me? My TLH goal is one-and-done for the year. Assuming no capital gains for the year, then I'll TLH one time to get $3K to offset ordinary income for the year. This larger TLH limit has caused me to miss many smaller TLH opportunities, that cumulatively would have summed to >$3K. (Recall some forum members use a limit of $500/TLH.)

Your choice.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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Re: Tax Loss Harvesting - Is it worth it?

Post by Artsdoctor » Thu Nov 07, 2019 8:04 pm

Richard1580 wrote:
Thu Nov 07, 2019 12:28 pm
Tax loss harvesting is simply a means of turning lemons into lemonade. The preferred outcome is to never have capital losses, either real or theoretical, but that is not realistic.

At its core TLH is simply a means of delaying paying capital gains taxes on an investment. If you have a paper loss in IndexA and exchange it for IndexB (similar but not identical, so your AA remains unchanged), you can write off up to $3,000 in income, however you have effectively lowered your cost basis, meaning when you do go to sell IndexB, you will be paying capital gains tax (15%) on the $3,000 you had previously written off.

If you were in the 22% tax bracket, you saved $660 in taxes in the year you took the loss, but you will be paying $450 in additional capital gains tax in the year you eventually sell IndexB, due to the lower cost basis. (Obviously this is also dependent on your tax bracket – if you are in the 12% tax bracket, you pay no capital gains.)

A greater advantage comes if you can TLH an asset that you never plan on selling at a gain and use the loss to offset capital gains you would otherwise have to pay tax on. If you hold that asset until death, then your heirs inherit it at the stepped-up cost basis and no tax is ever paid (other than estate taxes).

It can also be very useful when rebalancing. I was able to use TLH at the end of last year when the market tanked to make some major adjustments to the holdings in my AA. As a result, what would have been a five-figure capital gain was reduced to four-figures.

Tax loss harvesting has its uses, but I think its benefits are often exaggerated.
The bolded quote above is sometimes true but you really cannot make a statement like that without qualifying it. Everyone will really have to do their own math, take a look at their marital status, and really understand their state income tax rules.

First, there are actually people who work, make quite a bit of money, and retire finding themselves in a situation where they actually don't have to pay federal tax on capital gains. We do still have a 0% capital gains bracket. So those people deducted $3,000 each and every year and don't pay capital gains when the asset is later sold.

Second, as you alluded to to some extent, those shares with newer (and lower) cost basis are perfect to someday contribute to your donor advised fund if you're charitably inclined. Hopefully, you've batched your deductions and can transfer several years worth of donations in the form of appreciated shares to the extent allowable under tax law.

Third, you have to really know your state tax laws. California allows you to carryover all of those losses. And we're a community-property state. So when one spouse dies, ALL of the assets that are held jointly get the stepped up basis at the time of death. The surviving spouse is then free to spend all of those appreciated shares without paying any capital gains.

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Re: Tax Loss Harvesting - Is it worth it?

Post by abuss368 » Thu Nov 07, 2019 8:06 pm

I have not done any tax lost harvesting in a long time. Just buying and staying the course. I recall an interview where Mr. Bogle did not seem to recommend it.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Tax Loss Harvesting - Is it worth it?

Post by Artsdoctor » Thu Nov 07, 2019 8:11 pm

abuss368 wrote:
Thu Nov 07, 2019 8:06 pm
I have not done any tax lost harvesting in a long time. Just buying and staying the course. I recall an interview where Mr. Bogle did not seem to recommend it.
But again, everyone should take a look at their own situation. I would never expect a Pennsylvanian, like Mr. Bogle, to give me tax advice that would be specific for California. He may not have had a donor advised fund. There are too many variables.

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Re: Tax Loss Harvesting - Is it worth it?

Post by abuss368 » Thu Nov 07, 2019 8:14 pm

Artsdoctor wrote:
Thu Nov 07, 2019 8:11 pm
abuss368 wrote:
Thu Nov 07, 2019 8:06 pm
I have not done any tax lost harvesting in a long time. Just buying and staying the course. I recall an interview where Mr. Bogle did not seem to recommend it.
But again, everyone should take a look at their own situation. I would never expect a Pennsylvanian, like Mr. Bogle, to give me tax advice that would be specific for California. He may not have had a donor advised fund. There are too many variables.
That is fair and I would agree.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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