Locking in Losses for a Newbie (TLH?)

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virginiabirdie
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Locking in Losses for a Newbie (TLH?)

Post by virginiabirdie » Thu Mar 26, 2020 1:38 pm

We have a loss of $65k on an international stock fund given the recent downturn in the market.

I'm thinking of selling that holding to lock in the capital gains loss, and putting the money into a domestic stock fund instead. (Our AA is out of whack anyway. This move brings it back in line.)

I'm assuming I'll be able to then hold that capital gains loss to offset a future gain or - if I don't have any gains - to deduct $3k against ordinary income every year until for roughly the next 20 years.

Feels like a no-brainer, so I'm wondering why I don't see more folks talk about doing this, or what I may be missing here. Thoughts?

magicrat
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Re: Locking in Losses for a Newbie (TLH?)

Post by magicrat » Thu Mar 26, 2020 1:43 pm

Lots of people talking about and doing TLH. Use the search function.

mega317
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Re: Locking in Losses for a Newbie (TLH?)

Post by mega317 » Thu Mar 26, 2020 1:43 pm

I'm not sure what you're missing since every other thread is about tax loss harvesting.

Do you own international in other tax-advantaged accounts? Otherwise you are making a big change to your investing strategy and might want to think twice.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

Gufomel
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Re: Locking in Losses for a Newbie (TLH?)

Post by Gufomel » Thu Mar 26, 2020 1:51 pm

Selling your international fund at a loss and then buying a similar international fund in order to claim the loss (otherwise called Tax Loss Harvesting - TLH) would likely be a smart move. However, selling your international fund to purchase a US fund is a significant shift in asset classes. You mentioned that your AA is out of whack and this move would bring it back in line. I’m not sure that’s possible, since international has trailed US for quite some time. You probably need to actually sell some US to purchase international if the goal is to bring your AA back in line.

There’s lots of arguments as to whether to hold international or not. But selling international to move to US simply because international has lost a lot is generally not a wise move (it’s selling low and buying high).

rbaldini
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Re: Locking in Losses for a Newbie (TLH?)

Post by rbaldini » Thu Mar 26, 2020 1:55 pm

Rebalancing to your desired allocation AND tax loss harvesting sounds like a no brainer to me.

Most of this time it doesn't work out like this. When a fund drops in value, that means its contribution to your portfolio decreases, so you usually buy more of it to maintain your allocation at the desired level. That might be why you don't often read about it.

dbr
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Re: Locking in Losses for a Newbie (TLH?)

Post by dbr » Thu Mar 26, 2020 2:13 pm

virginiabirdie wrote:
Thu Mar 26, 2020 1:41 pm
We have a loss of $65k on an international stock fund given the recent downturn in the market.

I'm thinking of selling that holding to lock in the capital gains loss, and putting the money into a domestic stock fund instead. (Our AA is out of whack anyway. This move brings it back in line.)

I'm assuming I'll be able to then hold that capital gains loss to offset a future gain or - if I don't have any gains - to deduct $3k against ordinary income every year until for roughly the next 20 years.

Feels like a no-brainer, so I'm wondering why I don't see more folks talk about doing this, or what I may be missing here. Thoughts?
I guess there isn't much to say about a no-brainer. But, of course, if you have reason to move out of one asset and into another and you take a tax loss at the same time, that would be a logical thing to do. People are allowed to have out of whack asset allocations for whatever reason and would likely think of doing something to fix it when the opportunity presents.

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Flobes
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Re: Locking in Losses for a Newbie (TLH?)

Post by Flobes » Thu Mar 26, 2020 2:19 pm

Just to clarify the terminology.

"Tax Loss Harvesting" means selling something, and buying something very similar but not identical. This maximizes the tax value of the loss while maintaining asset allocation.

"Locking in losses" refers to selling at a loss, then letting the money idle in cash, not invested.

"Rebalancing" refers to making adjustments when your desired asset allocation gets out of whack because different investments gain and lose at different rates. Sell some assets that have grown over-weighted, at a loss or at a gain, to purchase those that are now below desired target.

You are proposing changing your asset allocation from international to domestic investments, by selling at at loss in international. This change may or may not be a good idea for you based on your personal plan and strategy.

Selling at a loss, and using carry-forward losses for tax advantages for years to come, is a worthy tactic.

dbr
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Re: Locking in Losses for a Newbie (TLH?)

Post by dbr » Thu Mar 26, 2020 3:14 pm

Flobes wrote:
Thu Mar 26, 2020 2:19 pm
Just to clarify the terminology.

"Tax Loss Harvesting" means selling something, and buying something very similar but not identical. This maximizes the tax value of the loss while maintaining asset allocation.

"Locking in losses" refers to selling at a loss, then letting the money idle in cash, not invested.

"Rebalancing" refers to making adjustments when your desired asset allocation gets out of whack because different investments gain and lose at different rates. Sell some assets that have grown over-weighted, at a loss or at a gain, to purchase those that are now below desired target.

You are proposing changing your asset allocation from international to domestic investments, by selling at at loss in international. This change may or may not be a good idea for you based on your personal plan and strategy.

Selling at a loss, and using carry-forward losses for tax advantages for years to come, is a worthy tactic.
I can't tell if the plan is to change the asset allocation or actually just rebalancing. In any case your clarification should be helpful.

Topic Author
virginiabirdie
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Re: Locking in Losses for a Newbie (TLH?)

Post by virginiabirdie » Thu Mar 26, 2020 8:47 pm

All wonderfully helpful replies. Thank you. There are always so angles and nuances, I worry about making decisions. This was really helpful. I sold today. Couldn't have done it w/o your confirmation.

And now I know it's called "locking in a loss." :)

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Flobes
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Re: Locking in Losses for a Newbie (TLH?)

Post by Flobes » Thu Mar 26, 2020 9:33 pm

virginiabirdie wrote:
Thu Mar 26, 2020 8:47 pm
I sold today.
Now, you can do whatever you want with the money from sale proceeds: rebalance, change your allocation, leave them as a cash reserve, buy a boat.

Next year, you'll report the loss on your taxes, based on a 1099 your broker will send you, then perhaps you'll be carrying the loss forward for many years to come.

However, if you buy back whatever you sold today within the next 31 days, you will create what's called a wash sale, and the loss will be disallowed.

Here's the wiki tutorial: Wash Sale.

Come back and ask us if you have any more questions.

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Noobvestor
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Re: Locking in Losses for a Newbie (TLH?)

Post by Noobvestor » Thu Mar 26, 2020 9:37 pm

virginiabirdie wrote:
Thu Mar 26, 2020 1:38 pm
We have a loss of $65k on an international stock fund given the recent downturn in the market.

I'm thinking of selling that holding to lock in the capital gains loss, and putting the money into a domestic stock fund instead. (Our AA is out of whack anyway. This move brings it back in line.)

I'm assuming I'll be able to then hold that capital gains loss to offset a future gain or - if I don't have any gains - to deduct $3k against ordinary income every year until for roughly the next 20 years.

Feels like a no-brainer, so I'm wondering why I don't see more folks talk about doing this, or what I may be missing here. Thoughts?
If you're at Vanguard, there are two international index funds that cover domestic and emerging you could TLH between. There is also a pair of developed and emerging funds you could split into according to market weights. That would be tax loss harvesting.

Selling the asset class that has done worse this past decade for the one that has done better? That's pretty severe market timing, and a pretty good way to consistently lose money over time. A post from Taylor you may find helpful: viewtopic.php?t=67882
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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virginiabirdie
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Re: Locking in Losses for a Newbie (TLH?)

Post by virginiabirdie » Fri Mar 27, 2020 7:31 am

I sold the VTIAX in taxable account. I still have some in my retirement account. I assume that I also need to turn off dividend reinvestment there? Anything else I'm missing.
;
Thank you for Wiki link. I've read it ad nauseum, though I wonder if maybe I missed something.

Topic Author
virginiabirdie
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Re: Locking in Losses for a Newbie (TLH?)

Post by virginiabirdie » Fri Mar 27, 2020 7:46 am

Noobvestor wrote:
Thu Mar 26, 2020 9:37 pm
Selling the asset class that has done worse this past decade for the one that has done better? That's pretty severe market timing, and a pretty good way to consistently lose money over time. A post from Taylor you may find helpful: viewtopic.php?t=67882
Good point. When I made the portfolio, which I haven't touched in years, I put 20% in international, per some book I read. (Can't remember which one, but it's one that's generally in line w/Boglehead philosophy.) But I've since read arguments for holding less int'l or none, which make sense to me too. So I figured I'd split the difference, in a way: sell VTIAX in taxable account and take the loss. But still hold VTIAX in retirement accounts.

I posted a few minutes ago about wash sale rule. I turned off Dividend reinvestment. But curious, if I had left it on, would one reinvestment disallow the 60k+ loss? The wiki seems to say no, but my reading comprehension isn't great...going on 5 hours sleep and having rambunctious kids in house for two weeks straight. :)

Just thought of dividend reinvestment this morning, and hope I didn't miss anything else. If so, please chime in!

Thank you all.

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BL
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Re: Locking in Losses for a Newbie (TLH?)

Post by BL » Fri Mar 27, 2020 8:17 am

If you sold what distributions were reinvested within 30 days +- of the sale, you may be fine. It gets more complicated if you have reinvested in a nearly identical fund in your or your spouse's IRA (traditional or Roth), and some would say in any retirement account. Nevertheless, it would only be that amount that would be affected. Most Vanguard dividends have already been distributed this month for the quarter.

JakeyLee
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Re: Locking in Losses for a Newbie (TLH?)

Post by JakeyLee » Fri Mar 27, 2020 9:59 am

Quick related TLH question: would it matter how long OP has held the position? What I mean is, if OP bought a stock 4 months ago, sells for a loss and then buys another like stock, could/ would that presumably work for TLH purposes?

dbr
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Re: Locking in Losses for a Newbie (TLH?)

Post by dbr » Fri Mar 27, 2020 10:05 am

JakeyLee wrote:
Fri Mar 27, 2020 9:59 am
Quick related TLH question: would it matter how long OP has held the position? What I mean is, if OP bought a stock 4 months ago, sells for a loss and then buys another like stock, could/ would that presumably work for TLH purposes?
Of course. The one issue with timing is that the loss is short term until one has held over a year at which point the loss becomes long term. Short term losses can be more useful depending on what they offset.

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virginiabirdie
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Re: Locking in Losses for a Newbie (TLH?)

Post by virginiabirdie » Tue Mar 31, 2020 7:52 am

BL wrote:
Fri Mar 27, 2020 8:17 am
If you sold what distributions were reinvested within 30 days +- of the sale, you may be fine. It gets more complicated if you have reinvested in a nearly identical fund in your or your spouse's IRA (traditional or Roth), and some would say in any retirement account. Nevertheless, it would only be that amount that would be affected. Most Vanguard dividends have already been distributed this month for the quarter.
Thanks, this is what I read too. Glad to have it confirmed.

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