Is it worth "diversifying" my taxable account for easier tax loss harvesting?

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lunchbox_tragedy
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Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by lunchbox_tragedy »

I opened my first taxable account last year with Fidelity. I've held only two positions, ITOT and IXUS, for a broad index based tax efficient allocation (I also have some bond index funds and an REIT index in my tax deferred accounts). One thing I want to be ready to do in the future is tax loss harvest. I think I understand the general process, although I'm nervous about a couple issues. One is avoiding wash sales since I typically buy shares of both these ETFs twice monthly when I get paid. I guess I can avoid this by making sure any lots purchased within the 30 days beforehand are also sold when harvesting (which presumably they will be, having the greatest loss). The other issue is a bit more cumbersome...

Since I've been investing in ETFs in my taxable account, I'm nervous about selling them to tax loss harvest by buying a similar mutual fund. The fact that the ETF is sold instantly and the mutual price fund isn't determined until the end of the day, coupled with market volatility, could cause me to lose a lot of money in a sale (see scenario #9 from the WCI: https://www.whitecoatinvestor.com/9-rea ... s-harvest/), potentially erasing the benefit any time I tax loss harvest.

My question, then: is it worth "diversifying" with some mutual funds (e.g. splitting my domestic stock between ITOT and FSKAX) in my taxable account to split each asset class? The ETF portion would save me some money on taxes with fewer capital gains distributions, and the mutual fund portion would allow me to tax loss harvest more easily without the risk of losses due to volatility in the trade. Of course I'd have to pay some more taxes on the capital gains distributions from the mutual funds - but since they're all index funds this should be much less than the benefit derived from tax loss harvesting during a downturn, right? Any thoughts or experiences?
livesoft
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by livesoft »

Two things:

1. Why would you not just immediately buy a substantially similar but not substantially identical ETF without waiting at all?

2. If you sell only $500 worth of an ETF, that $500 may not meet the initial minimum purchase amount for a mutual fund that you do not already own anyways, so you are going to have to have an ETF already decided upon anyways.
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Pandemic Bangs
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by Pandemic Bangs »

lunchbox_tragedy wrote: Sun Jan 10, 2021 5:25 pm
Since I've been investing in ETFs in my taxable account, I'm nervous about selling them to tax loss harvest by buying a similar mutual fund. The fact that the ETF is sold instantly and the mutual price fund isn't determined until the end of the day, coupled with market volatility, could cause me to lose a lot of money in a sale (see scenario #9 from the WCI: https://www.whitecoatinvestor.com/9-rea ... s-harvest/), potentially erasing the benefit any time I tax loss harvest.
This is why I like Schwab and ETFs for this (and for most of my taxable). I can write one ticket that includes both the SELL and BUY orders and they are executed simultaneously (sub-second). Maybe this happens everywhere but I have at least one other popular brokerage where I can only do this serially. Since I only TLH on @livesoft's "RBDs," I worry that things can happen in those few minutes.

I also like that I can watch the spreads fluctuate on the SELL and BUY order before I execute. I may sit and wait for five or ten minutes before pouncing. I'm sure I've saved several whole dollars ( :D ) but it gives me some sense of control.
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anil686
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by anil686 »

I don’t think so - it is pretty easy to do as Livesoft said earlier. I would also add that if you plan on contributing to your taxable account on a regular basis for a long time, your opportunities to TLH will go down over time as your gains add up. IOW, TLH is easier to do when you start investing but after even a few years of the market going up, those opportunities of smaller moves (down 5 or even 10%) may not offer great opportunities to TLH. You may be limited to larger drops like what happened earlier this year. I only say this to re-enforce keeping it simple and not over analyzing things is a good goal to have - it should help you stay the course. Hope that helps.....
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by abuss368 »

I would consider buying the same or equivalent ETF.

Keep investing simple.

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Topic Author
lunchbox_tragedy
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by lunchbox_tragedy »

livesoft wrote: Sun Jan 10, 2021 5:59 pm Two things:

1. Why would you not just immediately buy a substantially similar but not substantially identical ETF without waiting at all?
I guess this is a possibility, maybe I'm a little intimidated when it comes to finding comparable ETFs to buy. I like to split my taxable between my total international stock allocation (IXUS, which is about 20% of my overall equity), and some of my total domestic stock allocation (ITOT).

For ITOT I guess I could trade into IVV and lose some mid-and small-cap diversification. I don't see an iShares ETF that has an extended market index, but if you know one let me know. I could just rachet down the porportion in my S&P 500 index in my 403(b) to keep my asset allocation the same. I could also buy some small and mid cap indexes, but man is my portfolio going to get more complicated...

For IXUS I see VXUS, VT, and SPGM as possible alternatives. The latter two appear to overlap with domestic indexes since they don't track an ex US index, though, right?
livesoft
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by livesoft »

Your broker should allow you to buy non-iShare ETFs without a commission, such as Vanguard, Schwab, and SPDR products. You need to check into that.
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lunchbox_tragedy
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by lunchbox_tragedy »

anil686 wrote: Sun Jan 10, 2021 6:18 pm IOW, TLH is easier to do when you start investing but after even a few years of the market going up, those opportunities of smaller moves (down 5 or even 10%) may not offer great opportunities to TLH. You may be limited to larger drops like what happened earlier this year.
I'm not sure I follow...as my balances increase, won't any downward swings in the value of my shares also increase in magnitude, making TLH easier? And large downturns would seem to be the best time to do it, collecting tens of thousands in losses that could offset my income taxed at the marginal rate and capital gains for years to come. I agree that it definitely doesn't seem simple, though...
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lunchbox_tragedy
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by lunchbox_tragedy »

livesoft wrote: Sun Jan 10, 2021 6:38 pm Your broker should allow you to buy non-iShare ETFs without a commission
Yes, I've realized this. From what I can tell alternative funds wound be:

IXUS --> VXUS

ITOT --> VTI

So I guess I have a plan now...
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by livesoft »

Suppose you bought shares 3 or 4 years ago and they increased in price 50% to 100%. What kind of drop would have to happen for those shares to have losses? I am asking you to do some math.
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lunchbox_tragedy
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by lunchbox_tragedy »

livesoft wrote: Sun Jan 10, 2021 7:02 pm Suppose you bought shares 3 or 4 years ago and they increased in price 50% to 100%. What kind of drop would have to happen for those shares to have losses? I am asking you to do some math.
I'm still learning about the process...but from what I can tell the losses are based on the cost basis of individual lots of purchased shares. The ones from years ago don't have to go negative to allow harvesting. I could harvest from losses in value of more recently purchased shares in a downturn.
livesoft
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by livesoft »

^Exactly, the older shares will not have losses, but the new shares might have losses. For instance, what is the value of all your newer shares purchased in 2020? What dollar amount do you expect to contribute in 2021? Do you see how things roll off the back end as you add to the front end? But then every once in a while a large drop allows one to TLH even older shares.

It should be very obvious that the best time to tax-loss harvest in any year is at the market low! That is also the best time to buy shares. Of course, no one knows if the lowest day when it happens will end up being the lowest day of the year, but they do know that the days before that day were NOT the lowest day of the year.
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international001
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by international001 »

Why is the best moment to buy stocks it's at the low? Unless you have a crystal ball and know it's the low and they are going to go up after that.
What it's important is that if you have a lot of shares that went down, you should sell them, stay out of the market as little as possible and buy something else.

When I do TLH, I don't worry about that 1% WCI is complaining about. I only do TLH after market has gone down perhaps 10%. But if you want to optimize it, perhaps split your sells/buys amongst a few trades, so you minimize that risk.

Also, if you do ITOT --> VTI, I'd think wash rules could apply, so TLH would not really happen.
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lunchbox_tragedy
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by lunchbox_tragedy »

^ You want to buy low so you can sell them at a higher price, that's how ya make :moneybag :moneybag :moneybag

Of course no one knows when they'll be low, so I follow the (pretty standard) advice of dollar cost averaging and putting a little bit towards my index funds every month (actually a lot of bit on the order of $8-10k, but I'm a high earner which is why I have these questions about a taxable account!)

ITOT and VTI track different indexes (S&P Total Market Index™ (TMI) vs CRSP US Total Market Index, respectively) so I think the most predominant opinion I've found is that they're safe and wouldn't trigger a wash sale.
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by unbiased »

On my Schwab platform I'll TLH by selling specific lots after a dip--just don't buy any more of that fund for 30+ days (buy another).

But as was mentioned, it's a good problem to have when there's been a bull market and there are few "losses" left to harvest...
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by international001 »

lunchbox_tragedy wrote: Sun Jan 10, 2021 8:38 pm ^ You want to buy low so you can sell them at a higher price, that's how ya make :moneybag :moneybag :moneybag

Of course no one knows when they'll be low, so I follow the (pretty standard) advice of dollar cost averaging and putting a little bit towards my index funds every month (actually a lot of bit on the order of $8-10k, but I'm a high earner which is why I have these questions about a taxable account!)

ITOT and VTI track different indexes (S&P Total Market Index™ (TMI) vs CRSP US Total Market Index, respectively) so I think the most predominant opinion I've found is that they're safe and wouldn't trigger a wash sale.
If I had the ability to buy low, this would mean I had a crystal ball. I'd rather invest on lottery tickets ;-)
I just sell my recent stock during a dip and transition to some other fund/ETF ASAP. Just tax optimization, nothing about trying to time the market.

DCA sometimes mean something different. IF you just invest a portion of what you earn every month, that's the best you can do. If you get to get a $100k lump sum one day, just invest it and don't try to do DCA over it.

I didn't know ITOT and VTI where different. Personally, I wouldn't risk the IRS would consider them substantially different; but I don't think anybody has gotten in trouble for it yet.
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by grabiner »

lunchbox_tragedy wrote: Sun Jan 10, 2021 5:25 pm Since I've been investing in ETFs in my taxable account, I'm nervous about selling them to tax loss harvest by buying a similar mutual fund. The fact that the ETF is sold instantly and the mutual price fund isn't determined until the end of the day, coupled with market volatility, could cause me to lose a lot of money in a sale (see scenario #9 from the WCI: https://www.whitecoatinvestor.com/9-rea ... s-harvest/), potentially erasing the benefit any time I tax loss harvest.
This isn't a significant disadvantage, because gains or losses are random. If you sell on Wednesday and buy on Friday, you miss out on two days of stock-market returns, which is an average loss of about 0.05% (corresponding to a 7.5% annual return for a stock market open 250 days per year).

But you can always harvest ETF to ETF, or mutual fund to mutual fund, avoiding this issue.
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by justsomeguy2018 »

lunchbox_tragedy wrote: Sun Jan 10, 2021 8:38 pm ^ You want to buy low so you can sell them at a higher price, that's how ya make :moneybag :moneybag :moneybag

Of course no one knows when they'll be low, so I follow the (pretty standard) advice of dollar cost averaging and putting a little bit towards my index funds every month (actually a lot of bit on the order of $8-10k, but I'm a high earner which is why I have these questions about a taxable account!)

ITOT and VTI track different indexes (S&P Total Market Index™ (TMI) vs CRSP US Total Market Index, respectively) so I think the most predominant opinion I've found is that they're safe and wouldn't trigger a wash sale.
You're probably ok but I prefer to swap a total market fund for sp500 or other large cap fund just to be on the wash sale safe side. They track pretty similar.
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lunchbox_tragedy
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by lunchbox_tragedy »

^ I think when the time comes I'll swap ITOT for 80% VOO and 20% VFF to keep that money in the total market.. I'm not sure there's a similar arrangement for IXUS...VXUS is similar in it's scope for international equities, so maybe VEU is a better option with a narrower basket and less similar index.
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by aristotelian »

I don't see why you would intentionally hold multiple funds. Just start with one and when you have a harvesting opportunity you will get multiple funds soon enough. Remember, when you harvest a loss you will want to leave behind any shares with gains, so you will end up with multiple funds whether you like it or not.
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lunchbox_tragedy
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Re: Is it worth "diversifying" my taxable account for easier tax loss harvesting?

Post by lunchbox_tragedy »

^ The idea behind holding these funds is to stay diversified in a "total market" index. ITOT is a total market index, and if I combine a S&P 500 index and a extended market fund then I should be able to keep my asset allocation fairly stable.
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