anyone else tax loss harvesting like crazy?

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bobcat2
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Re: anyone else tax loss harvesting like crazy?

Post by bobcat2 »

9-5 Suited wrote: Wed May 11, 2022 2:46 pm Tell me this: yesterday I sold $20,000 of VXUS and invested it about 2 minutes later in IXUS, which has a 0.99 correlation. What market did I time?
You are making a market timing bet that if you sell and buyback now (by buying a nearly identical security) your lifetime taxes paid on the securities will be less than if you simply held the first security.

Nothing wrong with such a market timing scheme and you will probably, but not necessarily, come out ahead over your lifetime compared to simply holding and staying the course. I suspect, however, that most TLH enthusiasts overestimate the value of the tactic.

article by Jason Zweig in WSJ (12/11/2010).
tax-loss harvesting is far from the no-brainer your adviser might suggest. Steps you take to minimize your taxes today might come back to haunt you tomorrow, especially given the latest round of chaos on Capitol Hill. Often, "the true tax saving is much smaller than people have been led to believe, and tax-loss harvesting can easily end up costing you money," warns Kent Smetters, a tax expert and professor of risk management at the University of Pennsylvania's Wharton School.

Here is why. Say you put $10,000 into the SPDR S&P 500 exchange-traded index fund in the fall of 2007; it now is worth $8,000. You sell it and immediately put the $8,000 in Fidelity Spartan 500 Index, which also tracks the Standard & Poor's 500 index of U.S. stocks.

As a result, you have booked a $2,000 long-term capital loss on the SPDR fund. That can save you hundreds of dollars in taxes on capital gains that you have realized elsewhere in your portfolio this year. If you didn't lock in any gains, then you can use the loss to offset your ordinary income—a savings valued at $700 if you are in the 35% federal tax bracket.

The good news is obvious: By harvesting the loss today, you have reduced your taxes today. The bad news is subtle: You might have raised your taxes tomorrow.

But now let's say your index fund grows in value over the next decade to $16,000. Had you not sold in 2010, then a decade from now you would have a gain of $6,000 over your original $10,000 purchase price. But when you sold in 2010 and swapped into a similar fund, you lowered your entry price (or "tax basis") to $8,000—meaning that 10 years from now, you will owe taxes on an extra $2,000 in gains.

If tax rates stay constant, you will come out ahead, but not by much. After accounting generously for the fact that dollars today are worth more than dollars tomorrow, your true tax savings in this scenario would amount to $77, says Prof. Smetters. (This assumes you used your long-term loss to offset a long-term gain; it doesn't account for what you would have earned if you had invested the tax break back into the fund.)

As of this week, Congress seems likely to extend the current 15% capital-gains rate through 2012. But, warns tax expert Robert Willens, "I would put pretty high odds that they'll be increased after that."

If Congress were to raise the long-term capital-gains tax rate to 20%, you would save a total of only $2 in taxes over the next 10 years by harvesting your losses now, Prof. Smetters reckons. If the rate were to rise to 25%, then harvesting your losses now would nick you with $72 more in taxes than if you had done nothing.

Although these numbers fly in the face of conventional personal-finance wisdom, Prof. Smetters is "exactly right," says tax strategist Joel Dickson of Vanguard Group. Mr. Willens concurs: "If you expect tax rates to increase, it may well be wise to defer your losses."

None of this means that you shouldn't ever harvest losses. It does mean that you should look before you reap.

"People harvest tax losses almost reflexively," Mr. Willens says. "I've done it myself and then later realized I shouldn't have." He adds that Prof. Smetters's analysis shows that "the penalty you suffer from not acting precipitously isn't very high at all, so you should sit back and think it through before you act."
Link to article.
http://online.wsj.com/article/SB1000142 ... 21922.html


article in The White Coat Investor last week
I've been teaching people to tax-loss harvest here at The White Coat Investor for more than a decade. Only once during that time period did I receive pushback from someone about doing it. They didn't have any sort of legal or ethical issue with it. They simply questioned whether it was a good use of a doctor's time. I do think it is something worth learning to do if you have enough interest to manage your own portfolio, but it's not hard to make a case against doing it.

I'm not wealthy because I tax-loss harvest. I'm wealthy because I made a lot of money, saved a big chunk of it, and invested it in a reasonable way. Tax-loss harvesting is, at best, icing on the cake. At worst, it's actually impeding the building of wealth.


10 Reasons Not to Tax-Loss Harvest

#1 The Tax Break Isn't That Big
#2 It Might Be Just a Deferral of Tax
#3 Not Worth Hiring Someone to Do
#4 More Complex Portfolio
#5 Have to Watch the Markets More Closely
#6 Can Get Burned During the Transaction
#7 Unqualify Dividends
#8 Can't Put Investments on Autopilot
#9 Can't Reinvest Dividends
#10 Impact on IRA and 401(k) Investing

The bottom line is that if you have been looking for an excuse not to tax-loss harvest, there are plenty of them in this post. I'm certainly tax-loss harvesting a lot less frequently than I used to—and after reading this, I bet you will too.
Link to article - https://www.whitecoatinvestor.com/the-c ... arvesting/

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
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hornet96
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Re: anyone else tax loss harvesting like crazy?

Post by hornet96 »

bobcat2 wrote: Fri May 13, 2022 9:23 am You are making a market timing bet that if you sell and buyback now (by buying a nearly identical security) your lifetime taxes paid on the securities will be less than if you simply held the first security.

Nothing wrong with such a market timing scheme and you will probably, but not necessarily, come out ahead over your lifetime compared to simply holding and staying the course. I suspect, however, that most TLH enthusiasts overestimate the value of the tactic.

article by Jason Zweig in WSJ (12/11/2010).


If tax rates stay constant, you will come out ahead, but not by much.

....

If Congress were to raise the long-term capital-gains tax rate to 20%, you would save a total of only $2 in taxes over the next 10 years by harvesting your losses now, Prof. Smetters reckons. If the rate were to rise to 25%, then harvesting your losses now would nick you with $72 more in taxes than if you had done nothing.
There sure are a lot of "ifs" in those statements above. If you're going to say that tax loss harvesting now, based on known tax rates, is market timing - then by definition you have to agree that not tax loss harvesting now is also market timing, based on your forecast/expectations of (unconfirmed) rising tax rates.

However, market timing is really about predicting the future. So by ignoring opportunities to tax loss harvest now on the premise of expected rising tax rates in the future, you are in fact making a market timing decision by standing back and doing nothing today, while those of us taking advantage of TLH opportunities aren't trying to predict anything.

ETA: No, most TLH proponents aren't arguing you will pay "less" in taxes over the long term. Rather, if tax rates stay exactly where they are, TLH is nothing more than a tax deferral. But there is time value of money associated with deferring tax payments to some arbitrary point in the future.
e5116
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Re: anyone else tax loss harvesting like crazy?

Post by e5116 »

hornet96 wrote: Fri May 13, 2022 10:00 am
bobcat2 wrote: Fri May 13, 2022 9:23 am You are making a market timing bet that if you sell and buyback now (by buying a nearly identical security) your lifetime taxes paid on the securities will be less than if you simply held the first security.

Nothing wrong with such a market timing scheme and you will probably, but not necessarily, come out ahead over your lifetime compared to simply holding and staying the course. I suspect, however, that most TLH enthusiasts overestimate the value of the tactic.

article by Jason Zweig in WSJ (12/11/2010).


If tax rates stay constant, you will come out ahead, but not by much.

....

If Congress were to raise the long-term capital-gains tax rate to 20%, you would save a total of only $2 in taxes over the next 10 years by harvesting your losses now, Prof. Smetters reckons. If the rate were to rise to 25%, then harvesting your losses now would nick you with $72 more in taxes than if you had done nothing.
There sure are a lot of "ifs" in those statements above. If you're going to say that tax loss harvesting now, based on known tax rates, is market timing - then by definition you have to agree that not tax loss harvesting now is also market timing, based on your forecast/expectations of (unconfirmed) rising tax rates.

However, market timing is really about predicting the future. So by ignoring opportunities to tax loss harvest now on the premise of expected rising tax rates in the future, you are in fact making a market timing decision by standing back and doing nothing today, while those of us taking advantage of TLH opportunities aren't trying to predict anything.

ETA: No, most TLH proponents aren't arguing you will pay "less" in taxes over the long term. Rather, if tax rates stay exactly where they are, TLH is nothing more than a tax deferral. But there is time value of money associated with deferring tax payments to some arbitrary point in the future.
Well, up to $3k can offset income tax, right? So, it's a deduction on current year's taxes too....If your income tax bracket is 32%+, that's a pretty good deal. But, of course, the $3k limit is quite low. I do wish they'd at least index that to inflation or something....

So, I'm saying it's not "just" a tax deferral if one's income tax rate is higher than capital gains tax rate.
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Re: anyone else tax loss harvesting like crazy?

Post by jgalt133 »

There are many arguments for/against tax loss harvesting. Every situation is different. Two good reasons to tax loss harvest:

* You expect that you will not fully spend your portfolio and thus your heirs will benefit from the step up basis at death (and you benefit from the realized losses).
* You are expecting large capital gains (e.g., you're trying to exit single stock positions that have appreciated over the years).
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9-5 Suited
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Re: anyone else tax loss harvesting like crazy?

Post by 9-5 Suited »

bobcat2 wrote: Fri May 13, 2022 9:23 am Nothing wrong with such a market timing scheme and you will probably, but not necessarily, come out ahead over your lifetime compared to simply holding and staying the course. I suspect, however, that most TLH enthusiasts overestimate the value of the tactic.
I think we're just disagreeing on the definition of 'market timing' then, because I agree with most of what you wrote. Tax arbitrage over time is not what most people mean by market timing. They mean getting into and out of certain investments due to a prediction about future investment performance.

If tax arbitrage is to be considered 'market timing' then a traditional 401K contribution is market timing. You are betting on a discrepancy in tax rates being advantageous to you. In the case of TLH, it's a very high likelihood to be true because there's a large 0% capital gains bracket in low income years vs. 15-20% in high income years. Also, you have a time-value of money effect that is beneficial from getting money today in the form of tax savings.

I agree the value may be smaller than many believe, but that's a totally separate argument than saying it's 'market timing'. The projected value is still positive, and the risk of it being a negative value event is small.

In summary, I consider it misleading to label TLH as market timing.
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Re: anyone else tax loss harvesting like crazy?

Post by plutoblackhole »

In addition to what everyone else said, TLH can also be beneficial if you live if a high tax state now and plan to retire somewhere that has a lower tax rate.
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hornet96
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Re: anyone else tax loss harvesting like crazy?

Post by hornet96 »

9-5 Suited wrote: Fri May 13, 2022 10:36 am
bobcat2 wrote: Fri May 13, 2022 9:23 am Nothing wrong with such a market timing scheme and you will probably, but not necessarily, come out ahead over your lifetime compared to simply holding and staying the course. I suspect, however, that most TLH enthusiasts overestimate the value of the tactic.
.....I consider it misleading to label TLH as market timing.
+1. It is extremely misleading to label TLH as market timing, and frankly I expect better from BobK (a long time member and organizer of a local BH chapter).
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bobcat2
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Re: anyone else tax loss harvesting like crazy?

Post by bobcat2 »

Hi hornet96,
You wrote -
you are in fact making a market timing decision by standing back and doing nothing today
So according to you, if you are a buy and hold investor who stays the course and doesn't sell & buy you are a market timer. That's a very "interesting" POV.

BobK
Last edited by bobcat2 on Fri May 13, 2022 11:23 am, edited 1 time in total.
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
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Re: anyone else tax loss harvesting like crazy?

Post by Diluted Waters »

exodusNH wrote: Thu May 12, 2022 8:58 am
bobcat2 wrote: Wed May 11, 2022 12:37 pm Tax loss harvesting is market timing. But it sounds so much better than I sold a bad investment for a loss. :wink:

BobK
It's not timing if you buy a similar fund. E.g. VTI and ITOT. They basically perform the same. Selling one when it's down and immediately buying the other is a lateral move. Your economic position hasn't changed. But you get losses to offset either gains or income. If you have no gains, you get to take up to $3000 off of your income, which is anywhere from $300 to $1200 of tax savings. You'll give some of it back when you eventually sell, due to capital gains. (Though some of them might be at the 0% rate.)
Very good summary.

I exchanged vanguard total bond into intermediate bond last month and used the losses to offset gains on the sale of a stock fund my former advisor bought years ago, making the sale and gains essentially tax-free (or perhaps tax deferred until I sell intermediate bond at a gain in the future).

I’ll probably round-trip back into total bond later this year to capture more losses if it continues to go down in price due to rising interest rates.

Meanwhile I’m getting rising yield and a nice monthly interest income from the bond fund without having to sell shares to raise cash.

As others have said, TLH done right is as close to a free lunch as one is likely to get. Yes, tax may be due later in life if one sells shares of the acquired fund in a harvesting transaction, but I don’t intend to sell shares to raise cash for the foreseeable future. And a tax deferred is a tax avoided, as others have quipped.
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Re: anyone else tax loss harvesting like crazy?

Post by drk »

plutoblackhole wrote: Fri May 13, 2022 10:38 am In addition to what everyone else said, TLH can also be beneficial if you live if a high tax state now and plan to retire somewhere that has a lower tax rate.
Yes. Tax-loss harvesting provides an implicit call option on tax rates, similar to using pre-tax over Roth. That's valuable for someone with a long time horizon who may be able to control the circumstances under which they realize gains in the future.
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hornet96
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Re: anyone else tax loss harvesting like crazy?

Post by hornet96 »

bobcat2 wrote: Fri May 13, 2022 11:17 am Hi hornet96,
You wrote -
you are in fact making a market timing decision by standing back and doing nothing today
So according to you, if you are a buy and hold investor who stays the course and doesn't sell & buy you are a market timer. That's a very "interesting" POV.

BobK
BobK, with all due respect, you are conflating several entirely different issues. TLH has absolutely nothing to do with "buying and holding," "market timing," or "staying the course."

By TLH you are still "buying and holding" (holding a similar fund with >99% performance correlation; e.g. total stock index to large cap index). A TLH'er isn't predicting anything with respect to security prices and is in fact continuing to "stay the course" with his investments, and is simply letting Uncle Sam (temporarily) subsidize his investment. His net asset allocation position is exactly the same before and after his TLH.

"Holding" doesn't mean literally holding the exact same fund, forever, no matter the circumstance. Rather, it means to hold your position (e.g. asset allocation, US/Int'l split, indexing methodology) through all market conditions.

With all that said, can you please address the actual substance of my comment? Your position is basically "don't mess with TLH, because tax rates are likely to go up and thus you'll pay more tax in the future." How is that POV not market timing with respect to tax law?
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Re: anyone else tax loss harvesting like crazy?

Post by jebmke »

bobcat2 wrote: Fri May 13, 2022 9:23 am
9-5 Suited wrote: Wed May 11, 2022 2:46 pm Tell me this: yesterday I sold $20,000 of VXUS and invested it about 2 minutes later in IXUS, which has a 0.99 correlation. What market did I time?
You are making a market timing bet that if you sell and buyback now (by buying a nearly identical security) your lifetime taxes paid on the securities will be less than if you simply held the first security.

Nothing wrong with such a market timing scheme and you will probably, but not necessarily, come out ahead over your lifetime compared to simply holding and staying the course. I suspect, however, that most TLH enthusiasts overestimate the value of the tactic.

article by Jason Zweig in WSJ (12/11/2010).
tax-loss harvesting is far from the no-brainer your adviser might suggest. Steps you take to minimize your taxes today might come back to haunt you tomorrow, especially given the latest round of chaos on Capitol Hill. Often, "the true tax saving is much smaller than people have been led to believe, and tax-loss harvesting can easily end up costing you money," warns Kent Smetters, a tax expert and professor of risk management at the University of Pennsylvania's Wharton School.

Here is why. Say you put $10,000 into the SPDR S&P 500 exchange-traded index fund in the fall of 2007; it now is worth $8,000. You sell it and immediately put the $8,000 in Fidelity Spartan 500 Index, which also tracks the Standard & Poor's 500 index of U.S. stocks.

As a result, you have booked a $2,000 long-term capital loss on the SPDR fund. That can save you hundreds of dollars in taxes on capital gains that you have realized elsewhere in your portfolio this year. If you didn't lock in any gains, then you can use the loss to offset your ordinary income—a savings valued at $700 if you are in the 35% federal tax bracket.

The good news is obvious: By harvesting the loss today, you have reduced your taxes today. The bad news is subtle: You might have raised your taxes tomorrow.

But now let's say your index fund grows in value over the next decade to $16,000. Had you not sold in 2010, then a decade from now you would have a gain of $6,000 over your original $10,000 purchase price. But when you sold in 2010 and swapped into a similar fund, you lowered your entry price (or "tax basis") to $8,000—meaning that 10 years from now, you will owe taxes on an extra $2,000 in gains.

If tax rates stay constant, you will come out ahead, but not by much. After accounting generously for the fact that dollars today are worth more than dollars tomorrow, your true tax savings in this scenario would amount to $77, says Prof. Smetters. (This assumes you used your long-term loss to offset a long-term gain; it doesn't account for what you would have earned if you had invested the tax break back into the fund.)

As of this week, Congress seems likely to extend the current 15% capital-gains rate through 2012. But, warns tax expert Robert Willens, "I would put pretty high odds that they'll be increased after that."

If Congress were to raise the long-term capital-gains tax rate to 20%, you would save a total of only $2 in taxes over the next 10 years by harvesting your losses now, Prof. Smetters reckons. If the rate were to rise to 25%, then harvesting your losses now would nick you with $72 more in taxes than if you had done nothing.

Although these numbers fly in the face of conventional personal-finance wisdom, Prof. Smetters is "exactly right," says tax strategist Joel Dickson of Vanguard Group. Mr. Willens concurs: "If you expect tax rates to increase, it may well be wise to defer your losses."

None of this means that you shouldn't ever harvest losses. It does mean that you should look before you reap.

"People harvest tax losses almost reflexively," Mr. Willens says. "I've done it myself and then later realized I shouldn't have." He adds that Prof. Smetters's analysis shows that "the penalty you suffer from not acting precipitously isn't very high at all, so you should sit back and think it through before you act."
Link to article.
http://online.wsj.com/article/SB1000142 ... 21922.html


article in The White Coat Investor last week
I've been teaching people to tax-loss harvest here at The White Coat Investor for more than a decade. Only once during that time period did I receive pushback from someone about doing it. They didn't have any sort of legal or ethical issue with it. They simply questioned whether it was a good use of a doctor's time. I do think it is something worth learning to do if you have enough interest to manage your own portfolio, but it's not hard to make a case against doing it.

I'm not wealthy because I tax-loss harvest. I'm wealthy because I made a lot of money, saved a big chunk of it, and invested it in a reasonable way. Tax-loss harvesting is, at best, icing on the cake. At worst, it's actually impeding the building of wealth.


10 Reasons Not to Tax-Loss Harvest

#1 The Tax Break Isn't That Big
#2 It Might Be Just a Deferral of Tax
#3 Not Worth Hiring Someone to Do
#4 More Complex Portfolio
#5 Have to Watch the Markets More Closely
#6 Can Get Burned During the Transaction
#7 Unqualify Dividends
#8 Can't Put Investments on Autopilot
#9 Can't Reinvest Dividends
#10 Impact on IRA and 401(k) Investing

The bottom line is that if you have been looking for an excuse not to tax-loss harvest, there are plenty of them in this post. I'm certainly tax-loss harvesting a lot less frequently than I used to—and after reading this, I bet you will too.
Link to article - https://www.whitecoatinvestor.com/the-c ... arvesting/

BobK
Going forward, I'm not selling anything, ever so timing not an issue. As it turned out, I was able to live off re-balance proceeds tax-free for ten years from the great 2008-09 TLH extravaganza. Obviously N=1 but in general I prefer not to speculate on possible changes to the tax laws; I can predict with reasonable accuracy what my income is in the remainder of retirement so the tax cost on that is fairly predictable -- and I bet you can too.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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bobcat2
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Re: anyone else tax loss harvesting like crazy?

Post by bobcat2 »

Hi hornet96,

Consider the following.

Both Ralph and George own Apple stock. In recent weeks the stock has fallen about 20% so they both now own $100,000 in Apple stock. Ralph owns the stock in a taxable account. George owns Apple in his IRA.

Ralph decides to TLH his Apple position and to avoid the wash rule buys $100,000 0f the stock back 32 days later. George, fearful that the stock will fall further, also sells his position but vows to buy it back when its up 15% from its current low. Thirty six days later Apple is up 15% and George buys $100,000 of Apple. The only difference in their actions is 4 days.

Are neither market timing, are both market timing, or is only George market timing because while the actions are the same the motivation is different and market timing is determined by motivation and not action?

My overall position is that TLH is usually, but not always beneficial, and the gain is usually modest. I also believe that if you only take a particular action when the market is sharply down that's market timing. I see nothing wrong with well thought out market timing tactics.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
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Re: anyone else tax loss harvesting like crazy?

Post by Bfwolf »

bobcat2 wrote: Fri May 13, 2022 11:17 am Hi hornet96,
You wrote -
you are in fact making a market timing decision by standing back and doing nothing today
So according to you, if you are a buy and hold investor who stays the course and doesn't sell & buy you are a market timer. That's a very "interesting" POV.

BobK
Bob, I'd encourage you to rethink your position. Exchanging from one security to an extremely similar security is clearly not market timing. "Buy and hold" is also not the same thing as "staying the course." You can stay the course by tax loss harvesting into a very similar security.

Tax loss harvesting has clear financial advantages to most people based on current tax law. You can argue the juice is not worth the squeeze, and I'd disagree with you, and that would be fine. But to argue tax loss harvesting means you're not staying the course or is market timing is unfair and incorrect.
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Re: anyone else tax loss harvesting like crazy?

Post by AerialWombat »

I'm actively tax loss harvesting for the first time in my life in order to help reduce the capital gain tax bill from the sale of a rental property. Did the first two pairs this week, and it felt great to knock the tax bill down by a couple grand.
For entertainment purposes only.
jebmke
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Re: anyone else tax loss harvesting like crazy?

Post by jebmke »

Bfwolf wrote: Fri May 13, 2022 1:40 pm Tax loss harvesting has clear financial advantages to most people based on current tax law.
And the benefits can be not that far off. If you look at the recovery from the bottom in 2009 (and probably 2020 as well), one might expect that anyone who re-balanced on the way down would be re-balancing on the way up. The losses booked on the way down could easily be consumed in the first few years of a market recovery. I know that was the case in my situation. I'd have to go back and check but I think my last TLH rotation was mid-March 2009 and my first re-balance out of equity was in 2011.
When you discover that you are riding a dead horse, the best strategy is to dismount.
Dave55
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Re: anyone else tax loss harvesting like crazy?

Post by Dave55 »

Being a retiree, I am withdrawing from our portfolio to pay for living expenses. If I can harvest gains in my portfolio that are offset by loss's that I booked earlier by doing TLH-ing, I do. Market timing has nothing to do with this. I have done this on several occasions over the past decade and it has worked perfectly.

Dave
"Reality always wins, your only job is to get in touch with it." Wilfred Bion
Diluted Waters
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Re: anyone else tax loss harvesting like crazy?

Post by Diluted Waters »

Bfwolf wrote: Fri May 13, 2022 1:40 pm
bobcat2 wrote: Fri May 13, 2022 11:17 am Hi hornet96,
You wrote -
you are in fact making a market timing decision by standing back and doing nothing today
So according to you, if you are a buy and hold investor who stays the course and doesn't sell & buy you are a market timer. That's a very "interesting" POV.

BobK
Bob, I'd encourage you to rethink your position. Exchanging from one security to an extremely similar security is clearly not market timing. "Buy and hold" is also not the same thing as "staying the course." You can stay the course by tax loss harvesting into a very similar security.

Tax loss harvesting has clear financial advantages to most people based on current tax law. You can argue the juice is not worth the squeeze, and I'd disagree with you, and that would be fine. But to argue tax loss harvesting means you're not staying the course or is market timing is unfair and incorrect.
Of course there has to be a return from the effort taken to TLH. For, me, I will save a couple of thousand dollars on taxes this year for 5 minutes of work, even net of changing my dividends from qualified to non-qualified for a year after. I suspect a sizable number of people can realize this kind of cost-benefit ratio.

With respect to staying the course, lets look at it with a nautical analogy: if I'm on a ship headed in a particular direction, and I can delay for years paying the fare I'm paying to ride by very inexpensively moving to another, very similar ship that's still headed in the same direction to the same destination, I don't see how that is timing the market. The goal and direction and speed are the same, it's just taking advantage of another cost-advantaged ship coming along that's going my way...
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hornet96
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Re: anyone else tax loss harvesting like crazy?

Post by hornet96 »

bobcat2 wrote: Fri May 13, 2022 1:33 pm Hi hornet96,

Consider the following.

Both Ralph and George own Apple stock. In recent weeks the stock has fallen about 20% so they both now own $100,000 in Apple stock. Ralph owns the stock in a taxable account. George owns Apple in his IRA.

Ralph decides to TLH his Apple position and to avoid the wash rule buys $100,000 0f the stock back 32 days later. George, fearful that the stock will fall further, also sells his position but vows to buy it back when its up 15% from its current low. Thirty six days later Apple is up 15% and George buys $100,000 of Apple. The only difference in their actions is 4 days.

Are neither market timing, are both market timing, or is only George market timing because while the actions are the same the motivation is different and market timing is determined by motivation and not action?

My overall position is that TLH is usually, but not always beneficial, and the gain is usually modest. I also believe that if you only take a particular action when the market is sharply down that's market timing. I see nothing wrong with well thought out market timing tactics.

BobK
Unfortunately this reply has nothing to do with whether exchanging between similar index funds to TLH is “market timing,” and continues to avoid the actual question being asked.

So I’ll state it as a fact - eschewing TLH because you think tax rates will be higher in the future is market timing. Exchanging between similar index funds to claim a tax loss in the current year is definitively not market timing, particularly given there is no decision required to “buy back in” as implied by your Apple example. I’m in materially the same position holding large cap index forever as I am holding total stock index, so one doesn’t need to fret over whether or when to exchange back to the original position.
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9-5 Suited
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Re: anyone else tax loss harvesting like crazy?

Post by 9-5 Suited »

bobcat2 wrote: Fri May 13, 2022 1:33 pm Hi hornet96,

Consider the following.

Both Ralph and George own Apple stock. In recent weeks the stock has fallen about 20% so they both now own $100,000 in Apple stock. Ralph owns the stock in a taxable account. George owns Apple in his IRA.

Ralph decides to TLH his Apple position and to avoid the wash rule buys $100,000 0f the stock back 32 days later. George, fearful that the stock will fall further, also sells his position but vows to buy it back when its up 15% from its current low. Thirty six days later Apple is up 15% and George buys $100,000 of Apple. The only difference in their actions is 4 days.

Are neither market timing, are both market timing, or is only George market timing because while the actions are the same the motivation is different and market timing is determined by motivation and not action?

My overall position is that TLH is usually, but not always beneficial, and the gain is usually modest. I also believe that if you only take a particular action when the market is sharply down that's market timing. I see nothing wrong with well thought out market timing tactics.

BobK
You’ve constructed a straw man scenario to suit your preferred answer. Bogleheads discussing TLH are talking about simultaneous movement from one security into a nearly identical security with no time lost in the market and no change to asset allocation.

Calling this market timing is just incorrect by any reasonable definition of that term. It’s attempted tax arbitrage over time and (just like choosing traditional versus Roth) may or may not work out in your favor.
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Re: anyone else tax loss harvesting like crazy?

Post by jebmke »

Diluted Waters wrote: Fri May 13, 2022 2:11 pm Of course there has to be a return from the effort taken to TLH.
The good news is that for many people it is probably easy to do and virtually no cost. Exchanging a mutual fund for another mutual fund takes almost no time. If they are funds held in a MF account, the exchange occurs after the close so their is zero chance of a timing gap between the buy and the sell.

The availability of good TLH pairs has improved quite a bit in the last decade or two.
When you discover that you are riding a dead horse, the best strategy is to dismount.
Sandwich
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Re: anyone else tax loss harvesting like crazy?

Post by Sandwich »

Diluted Waters wrote: Fri May 13, 2022 2:11 pm .....

Of course there has to be a return from the effort taken to TLH. For, me, I will save a couple of thousand dollars on taxes this year for 5 minutes of work, even net of changing my dividends from qualified to non-qualified for a year after. I suspect a sizable number of people can realize this kind of cost-benefit ratio....
+1, although on some really down days, I am changing some of my dividends from non-qualified to qualified by taking a TLH on Wellesley and exchanging into 500 Index.

Other days just exchanging from Wellesley to LifeStrategy Conservative Growth.
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Re: anyone else tax loss harvesting like crazy?

Post by mangorunner »

LeeAtlantica2020 wrote: Tue May 10, 2022 1:10 pm Then the market dipped, and after 8 weeks I did TLH on a 100% basis -- all of FXNAX to FUAMX, all of FSKAX to FZROX, all of VXUS to IXUS. Was able to reduce the realized gains after all the short-term losses by about $20-30k.

Now 8 weeks later, market's downward trends continue, and I flipped back -- all of FUAMX back to FXNAX, all of FZROX back to FSKAX, all of IXUS back to VXUS. More short-term losses, now total realized gains for 2022 down to about $40k. (making sure dividend payouts are not violating wash sale rule)
I was surprised when I read this because I didn't realize that FSKAX and FZROX were acceptable tax-loss harvesting partners? I realize there has been lots and lots of discussion on these forums about what are considered acceptable TLH partners, what is considered "substantially identical", whether or not the IRS cares, and the lack of an official ruling. But somehow I thought that using these two as partners would be cutting it too closely.
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Re: anyone else tax loss harvesting like crazy?

Post by happysteward »

Multiple bounces from VBTLX to VBILX and back again….
"How much money is enough?", John Rockefeller responded, "...just a little bit more."
Brian2d
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Re: anyone else tax loss harvesting like crazy?

Post by Brian2d »

I tax loss harvested quite a bit in 2020 but haven't had enough losses yet this year to make it worthwhile (most of my fixed income is not in bond funds and didn't buy much stock in 2021). But tax loss harvesting if done properly is definitely not market timing and will do it if the market drops another 5-10 percent.
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Re: anyone else tax loss harvesting like crazy?

Post by DVMResident »

On a tactical comment, I love specific lot tracking. My funds overall have not generated a lot of TLH opportunities (mostly still in the green) but certain lots are in deep red territory.

Fidelity’s interface on specific lot sells make TLH really easy.
chance
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Re: anyone else tax loss harvesting like crazy?

Post by chance »

I don't see why someone would think TLH is market timing. Typically TLH involves selling one asset at a capital loss and immediately buying another to replace it, where the replacement asset is similar (but not the same) to avoid the wash-sale rule. Or if the investor waits >30 days they can buy back the exact same asset (which may involve a slight market timing element due to being out of the market for that short period).

Generally, all TLH does is (1) offer a current tax benefit by allowing you to write off the loss (up to $3k per year), and (2) reset your capital basis so that (assuming similar returns in both assets) you'll end up paying more taxes later. So, effectively, TLH is just a tax deferral strategy that would be beneficial if you are currently in a higher tax bracket than you expect to be in later.

It may also offer investors the potential benefit of making desired tweaks to their portfolios without having to incur gains and pay taxes.
hotelcalifornia
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Re: anyone else tax loss harvesting like crazy?

Post by hotelcalifornia »

Any recommendations for tax loss harvesting VFIFX while avoiding wash sale rule? Don’t want to be out of the market for 30 days.
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happysteward
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Re: anyone else tax loss harvesting like crazy?

Post by happysteward »

hotelcalifornia wrote: Sat May 14, 2022 11:54 am Any recommendations for tax loss harvesting VFIFX while avoiding wash sale rule? Don’t want to be out of the market for 30 days.
Hotelcalifornia, is this target date 2050 fund VFIFX in a taxable account? If it is in a tax deferred account like an IRA you cannot tax loss harvest….

Anyway to answer your question (assuming this is not a tax deferred account) perhaps consider another target date fund with a similar allocation, or match the VFIFX allocation using a stock fund (VTSAX, VFIAX) and a bond fund (VBTLX)…..

Your TLH partner just needs to be not “substantially identical”
"How much money is enough?", John Rockefeller responded, "...just a little bit more."
lazynovice
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Re: anyone else tax loss harvesting like crazy?

Post by lazynovice »

hotelcalifornia wrote: Sat May 14, 2022 11:54 am Any recommendations for tax loss harvesting VFIFX while avoiding wash sale rule? Don’t want to be out of the market for 30 days.
I’d suggest using this opportunity to get your taxable account out of a Target Date Fund. They really should not be held in a taxable account. Search for multiple threads here in January about the Vanguard Target Date snafu. And the issue isn’t limited to Vanguard Target Date funds.
Jimsad
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Re: anyone else tax loss harvesting like crazy?

Post by Jimsad »

LeeAtlantica2020 wrote: Tue May 10, 2022 1:10 pm We've now seen a very volatile and downward trending market. Anyone else tax loss harvesting repeatedly?

In my taxable Fidelity brokerage, as soon as 2022 turned over, I converted some of my dumb early tax-inefficient investments (VWELX + factor ETFs, all bought on account of an investment advisor I dumped) to a simpler 80/20 portfolio, with FXNAX being the bonds part and FSKAX and VXUS being the stocks part (mostly domestic exposure, maybe 10-15% in international). Yes, I know FSKAX not as optimal as, say, VTI, but for idiosyncratic reasons I preferred Fidelity's total market funds. Ended up with about $100k in realized gains after selling off VWELX and the factor ETFs.

Then the market dipped, and after 8 weeks I did TLH on a 100% basis -- all of FXNAX to FUAMX, all of FSKAX to FZROX, all of VXUS to IXUS. Was able to reduce the realized gains after all the short-term losses by about $20-30k.

Now 8 weeks later, market's downward trends continue, and I flipped back -- all of FUAMX back to FXNAX, all of FZROX back to FSKAX, all of IXUS back to VXUS. More short-term losses, now total realized gains for 2022 down to about $40k. (making sure dividend payouts are not violating wash sale rule)

I've TLH'd before but not more than once every few years. Now at this rate of market downturn, I may just about break even for the year. Or maybe even net myself a loss for the year! But as a set-it-and-forget-it investor, even this tiny number of trades makes me wary.

Is anyone else doing the same thing, flip-flopping between TLH partnered funds/ETF's with some regularity during this cyclical dip?
There is an investment property I am planning to sell in a few months and expect to pay about 30k in cap gain taxes .
I am harvesting about 28k losses from total stock index, int term tax exempt and international funds to offset these gains at tax time
DVMResident
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Re: anyone else tax loss harvesting like crazy?

Post by DVMResident »

chance wrote: Sat May 14, 2022 11:47 am I don't see why someone would think TLH is market timing. Typically TLH involves selling one asset at a capital loss and immediately buying another to replace it, where the replacement asset is similar (but not the same) to avoid the wash-sale rule. Or if the investor waits >30 days they can buy back the exact same asset (which may involve a slight market timing element due to being out of the market for that short period).
+1. The definition of market timing is
Market timing is the act of moving investment money in or out of a financial market—or switching funds between asset classes—based on predictive methods.
The predicting piece is what makes market timing a fool’s errand (most of the time). With TLH, there is no prediction at all. The L of TLH already happened. It’s a known known. There is no prediction at at all. You lost (past tense) money and you respond based on tax rules, which has nothing to do with prediction.
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Re: anyone else tax loss harvesting like crazy?

Post by Stinky »

DVMResident wrote: Sun May 15, 2022 3:02 am
chance wrote: Sat May 14, 2022 11:47 am I don't see why someone would think TLH is market timing. Typically TLH involves selling one asset at a capital loss and immediately buying another to replace it, where the replacement asset is similar (but not the same) to avoid the wash-sale rule. Or if the investor waits >30 days they can buy back the exact same asset (which may involve a slight market timing element due to being out of the market for that short period).
+1. The definition of market timing is
Market timing is the act of moving investment money in or out of a financial market—or switching funds between asset classes—based on predictive methods.
The predicting piece is what makes market timing a fool’s errand (most of the time). With TLH, there is no prediction at all. The L of TLH already happened. It’s a known known. There is no prediction at at all. You lost (past tense) money and you respond based on tax rules, which has nothing to do with prediction.
Very nice (and concise) explanation.
Former life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: anyone else tax loss harvesting like crazy?

Post by dcabler »

bobcat2 wrote: Fri May 13, 2022 11:17 am Hi hornet96,
You wrote -
you are in fact making a market timing decision by standing back and doing nothing today
So according to you, if you are a buy and hold investor who stays the course and doesn't sell & buy you are a market timer. That's a very "interesting" POV.

BobK
Over the years on this forum, I've seen just about everything imaginable labeled as "market timing", so none of this comes as a surprise at this point.

Cheers.
Raspberry-503
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Re: anyone else tax loss harvesting like crazy?

Post by Raspberry-503 »

jebmke wrote: Tue May 10, 2022 3:03 pm Almost all my equity basis was set on my last round trip in March, 2009. Doing some bonds though.
So you haven't invested since 2009? The overall fund could be in the black but if you purchased shares regularly, even through dividend reinvestment, some lots could still have losses.
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Re: anyone else tax loss harvesting like crazy?

Post by jebmke »

Raspberry-503 wrote: Sun May 15, 2022 9:30 am
jebmke wrote: Tue May 10, 2022 3:03 pm Almost all my equity basis was set on my last round trip in March, 2009. Doing some bonds though.
So you haven't invested since 2009? The overall fund could be in the black but if you purchased shares regularly, even through dividend reinvestment, some lots could still have losses.
Retired in 2007. I was re-balancing out of equity for a while after the recovery started but haven't made a significant trade in many years. As a result, most of my funds have one single lot that was purchased sometime in 2009. I had a couple of remnants (legacy international funds with higher ERs that I forgot to clean up back then. When the market had the down tick in March of 2020 I cleared those out. I have no unrealized losses except a bit in bonds that I am monitoring.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Re: anyone else tax loss harvesting like crazy?

Post by Raspberry-503 »

Makes sense jebmke
everlearner
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Re: anyone else tax loss harvesting like crazy?

Post by everlearner »

TLHing in IBKR is giving me a pause. I have a cash account and have not enabled the margin account. It seems if I sell one investment, I have to wait for it to settle (approx 2 days) before I can buy the replacement investment. Is my understanding correct? If yes, is there a way to TLH immediately? Getting a margin account is one option but i am typically wary of having it.
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Re: anyone else tax loss harvesting like crazy?

Post by drk »

everlearner wrote: Sun May 15, 2022 10:35 am TLHing in IBKR is giving me a pause. I have a cash account and have not enabled the margin account. It seems if I sell one investment, I have to wait for it to settle (approx 2 days) before I can buy the replacement investment. Is my understanding correct? If yes, is there a way to TLH immediately? Getting a margin account is one option but i am typically wary of having it.
I'm not familiar with Interactive Brokers, but cash accounts at other brokers would allow you to use the unsettled funds to buy. You'll want to let that purchase settle before selling the assets in order to avoid a Free Riding violation, though.

Honestly, I thought the primary reason to use that brokerage was cheap margin, so you might be the first person to ask this question. :D
Mike Scott
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Re: anyone else tax loss harvesting like crazy?

Post by Mike Scott »

I'm done for now. I will go around again if the S&P drops 10% from the current level.
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LeeAtlantica2020
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Re: anyone else tax loss harvesting like crazy?

Post by LeeAtlantica2020 »

mangorunner wrote: Sat May 14, 2022 9:40 am
LeeAtlantica2020 wrote: Tue May 10, 2022 1:10 pm Then the market dipped, and after 8 weeks I did TLH on a 100% basis -- all of FXNAX to FUAMX, all of FSKAX to FZROX, all of VXUS to IXUS. Was able to reduce the realized gains after all the short-term losses by about $20-30k.

Now 8 weeks later, market's downward trends continue, and I flipped back -- all of FUAMX back to FXNAX, all of FZROX back to FSKAX, all of IXUS back to VXUS. More short-term losses, now total realized gains for 2022 down to about $40k. (making sure dividend payouts are not violating wash sale rule)
I was surprised when I read this because I didn't realize that FSKAX and FZROX were acceptable tax-loss harvesting partners? I realize there has been lots and lots of discussion on these forums about what are considered acceptable TLH partners, what is considered "substantially identical", whether or not the IRS cares, and the lack of an official ruling. But somehow I thought that using these two as partners would be cutting it too closely.
That was my initial assumption. Then I saw a number of online purveyors/blogs explicitly recommending FSKAX/FZROX as TLH partners (like PhysicianOnFIRE), the idea being lobbed around here without consensus, and finally just called up Fidelity, got someone reasonably knowledgeable about it on the phone, and got the all-clear. Which is to say: Fidelity isn't the IRS and a lot of their "advisors" are dunces. But he did tell me that he's see a *lot* of FSKAX-FZROX transactions for TLH this year, and since they *explicitly* follow different indices (FSKAX = mostly DOW, FZROX = proprietary index with a bit more mid-cap and low-cap exposure), he has not heard of any internal directive or advisor-level knowledge about them being essentially identical rather than substantially different.

So, either it's all good or there'll be a lot of pissy Fidelity retail investors come January 2023 when we get our tax forms, lol.
lazynovice
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Re: anyone else tax loss harvesting like crazy?

Post by lazynovice »

LeeAtlantica2020 wrote: Wed May 18, 2022 12:42 pm
mangorunner wrote: Sat May 14, 2022 9:40 am
LeeAtlantica2020 wrote: Tue May 10, 2022 1:10 pm Then the market dipped, and after 8 weeks I did TLH on a 100% basis -- all of FXNAX to FUAMX, all of FSKAX to FZROX, all of VXUS to IXUS. Was able to reduce the realized gains after all the short-term losses by about $20-30k.

Now 8 weeks later, market's downward trends continue, and I flipped back -- all of FUAMX back to FXNAX, all of FZROX back to FSKAX, all of IXUS back to VXUS. More short-term losses, now total realized gains for 2022 down to about $40k. (making sure dividend payouts are not violating wash sale rule)
I was surprised when I read this because I didn't realize that FSKAX and FZROX were acceptable tax-loss harvesting partners? I realize there has been lots and lots of discussion on these forums about what are considered acceptable TLH partners, what is considered "substantially identical", whether or not the IRS cares, and the lack of an official ruling. But somehow I thought that using these two as partners would be cutting it too closely.
That was my initial assumption. Then I saw a number of online purveyors/blogs explicitly recommending FSKAX/FZROX as TLH partners (like PhysicianOnFIRE), the idea being lobbed around here without consensus, and finally just called up Fidelity, got someone reasonably knowledgeable about it on the phone, and got the all-clear. Which is to say: Fidelity isn't the IRS and a lot of their "advisors" are dunces. But he did tell me that he's see a *lot* of FSKAX-FZROX transactions for TLH this year, and since they *explicitly* follow different indices (FSKAX = mostly DOW, FZROX = proprietary index with a bit more mid-cap and low-cap exposure), he has not heard of any internal directive or advisor-level knowledge about them being essentially identical rather than substantially different.

So, either it's all good or there'll be a lot of pissy Fidelity retail investors come January 2023 when we get our tax forms, lol.
You can look under YTD Tax activity to see whether Fidelity classifies your trade as a wash sale. You don’t have to wait until you get a 1099.

Brokers are only required to label something a wash sale when it is the same CUSIP in the same account.

It is up to you to report wash sales that involve different accounts or different CUSIPs. Most people on this board will classify two S&P 500 funds as substantially identical. Very few here will classify total market funds following two different indices, with different fee structures as substantially identical.
Hyperchicken
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Re: anyone else tax loss harvesting like crazy?

Post by Hyperchicken »

everlearner wrote: Sun May 15, 2022 10:35 am TLHing in IBKR is giving me a pause. I have a cash account and have not enabled the margin account. It seems if I sell one investment, I have to wait for it to settle (approx 2 days) before I can buy the replacement investment. Is my understanding correct? If yes, is there a way to TLH immediately? Getting a margin account is one option but i am typically wary of having it.
Merrill Edge brokerage account user here - I am able to sell one ETF and buy another ETF with the proceeds on the same day. No margin enabled and no cash balance.
lazynovice
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Re: anyone else tax loss harvesting like crazy?

Post by lazynovice »

mangorunner wrote: Sat May 14, 2022 9:40 am
LeeAtlantica2020 wrote: Tue May 10, 2022 1:10 pm Then the market dipped, and after 8 weeks I did TLH on a 100% basis -- all of FXNAX to FUAMX, all of FSKAX to FZROX, all of VXUS to IXUS. Was able to reduce the realized gains after all the short-term losses by about $20-30k.

Now 8 weeks later, market's downward trends continue, and I flipped back -- all of FUAMX back to FXNAX, all of FZROX back to FSKAX, all of IXUS back to VXUS. More short-term losses, now total realized gains for 2022 down to about $40k. (making sure dividend payouts are not violating wash sale rule)
I was surprised when I read this because I didn't realize that FSKAX and FZROX were acceptable tax-loss harvesting partners? I realize there has been lots and lots of discussion on these forums about what are considered acceptable TLH partners, what is considered "substantially identical", whether or not the IRS cares, and the lack of an official ruling. But somehow I thought that using these two as partners would be cutting it too closely.
Why? Fidelity went to the trouble of creating a separate fund (FZROX) for a reason.

They could have lowered FSKAX all the way to zero fees but they didn’t. (They did lower FSKAX fees when FZROX was created.)

FSKAX is for people who want a fund that follows a third party licensed index that can be held at any brokerage.

FZROX is for people who want a fund that follows an internally developed, cheaper index and who don’t mind not being able to transfer it out of Fidelity.
jsapiandante
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Re: anyone else tax loss harvesting like crazy?

Post by jsapiandante »

LeeAtlantica2020 wrote: Tue May 10, 2022 1:10 pm We've now seen a very volatile and downward trending market. Anyone else tax loss harvesting repeatedly?

In my taxable Fidelity brokerage, as soon as 2022 turned over, I converted some of my dumb early tax-inefficient investments (VWELX + factor ETFs, all bought on account of an investment advisor I dumped) to a simpler 80/20 portfolio, with FXNAX being the bonds part and FSKAX and VXUS being the stocks part (mostly domestic exposure, maybe 10-15% in international). Yes, I know FSKAX not as optimal as, say, VTI, but for idiosyncratic reasons I preferred Fidelity's total market funds. Ended up with about $100k in realized gains after selling off VWELX and the factor ETFs.

Then the market dipped, and after 8 weeks I did TLH on a 100% basis -- all of FXNAX to FUAMX, all of FSKAX to FZROX, all of VXUS to IXUS. Was able to reduce the realized gains after all the short-term losses by about $20-30k.

Now 8 weeks later, market's downward trends continue, and I flipped back -- all of FUAMX back to FXNAX, all of FZROX back to FSKAX, all of IXUS back to VXUS. More short-term losses, now total realized gains for 2022 down to about $40k. (making sure dividend payouts are not violating wash sale rule)

I've TLH'd before but not more than once every few years. Now at this rate of market downturn, I may just about break even for the year. Or maybe even net myself a loss for the year! But as a set-it-and-forget-it investor, even this tiny number of trades makes me wary.

Is anyone else doing the same thing, flip-flopping between TLH partnered funds/ETF's with some regularity during this cyclical dip?
I just did my first ever TLH on 5/16/22. If this dip keeps going down, I'll just buy back my original after 30 days.
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