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).
Link to article.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."
http://online.wsj.com/article/SB1000142 ... 21922.html
article in The White Coat Investor last week
Link to article - https://www.whitecoatinvestor.com/the-c ... arvesting/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.