What's the big deal on TLH

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Morik
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Re: What's the big deal on TLH

Post by Morik »

Florida Orange wrote: Mon Aug 01, 2022 9:49 am Morik, I follow your argument, but here's what I don't understand: When you tax loss harvest, you're using loses from one source to offset income from another source, thus reducing your taxable income, thus reducing your taxes. So you're paying less in taxes because you had less income. When you talk about reinvesting the tax savings, it sounds as if money suddenly appeared in your account. But it didn't. The money was there all along. All you did was not spend it on taxes. I suppose you could take some money out of your account and say "this is the money I didn't pay in taxes" and then invest it or buy lottery tickets with it and maybe it will turn into more money. But it was your money anyway. You have more money to invest because you paid less taxes because you had less taxable income because you used some loses to offset some gains. As far as I can see, tax loss harvesting doesn't create more money. Investing creates more money. Anything you do to decrease your expenses (in this case taxes) will leave you with more money to invest. What am I missing?
While the bolded part is true, tax loss harvesting does not require any reduction in your consumptive spending, and can always be layered on top of whatever other expense cutting/saving you are able to do.

Take any scenario where you are able to invest $X by whatever means (increasing your income, decreasing your expenses, etc, everything you are willing to do with your income & spending habits). You can always add tax loss harvesting on top of that (assuming you have unrealized losses in taxable accounts) to put yet more money into the investment account.

You are taking a paper loss out of the investment account and claiming it with the IRS in exchange for them giving you some money right now (or taking less of your money right now; since money is fungible you could think of it either way). You invest that money. Later when you sell the investment yes your cost basis will be higher (since you removed your higher basis as part of tax loss harvesting), but as you can see from my example the growth of the money the government handed you more than offsets that.
JS-Elcano
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Re: What's the big deal on TLH

Post by JS-Elcano »

I am considering TLH for the first time and have a question. If I sell VXUS (international ex-US ETF) and buy VTI (total stock ETF) while already having VTI, is it a wash sale?
Morik
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Re: What's the big deal on TLH

Post by Morik »

JS-Elcano wrote: Mon Aug 01, 2022 4:04 pm I am considering TLH for the first time and have a question. If I sell VXUS (international ex-US ETF) and buy VTI (total stock ETF) while already having VTI, is it a wash sale?
Wash sales require a sale of the security in question. If you sell VXUS for a loss, you can't claim the loss (it 'washes') if you purchased VXUS (or a substantially identical security) within the 30 days (not including day of sale) before the sale, or 30 days (not including day of sale) after the sale. There is some additional nuance if the purchased # of shares doesn't line up with the sold # of shares--you only 'wash' the loss on the number of shares up to the # you purchased.
But a purchase of a different security (that isn't 'substantially identical') will not wash away a realized loss from the sale of some other security.
Florida Orange
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Re: What's the big deal on TLH

Post by Florida Orange »

Morik, I see your point. I think we're kind of saying the same thing. Tax loss harvesting leaves you with more money to invest now, and investing now is better than investing later because the money has more time to grow. Is that basically it? I think what threw me was when, in an earlier post, you referred to the tax savings as "proceeds" which I thought meant profits or some additional source of revenue. Anyway, thank you for taking the time to explain it to me. I hope I never have to use it :D
JS-Elcano
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Re: What's the big deal on TLH

Post by JS-Elcano »

Morik wrote: Mon Aug 01, 2022 4:48 pm
JS-Elcano wrote: Mon Aug 01, 2022 4:04 pm I am considering TLH for the first time and have a question. If I sell VXUS (international ex-US ETF) and buy VTI (total stock ETF) while already having VTI, is it a wash sale?
Wash sales require a sale of the security in question. If you sell VXUS for a loss, you can't claim the loss (it 'washes') if you purchased VXUS (or a substantially identical security) within the 30 days (not including day of sale) before the sale, or 30 days (not including day of sale) after the sale. There is some additional nuance if the purchased # of shares doesn't line up with the sold # of shares--you only 'wash' the loss on the number of shares up to the # you purchased.
But a purchase of a different security (that isn't 'substantially identical') will not wash away a realized loss from the sale of some other security.
Great! Thank you for the clear explantion.
Elmo
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Joined: Wed Mar 25, 2020 1:57 pm

Re: What's the big deal on TLH

Post by Elmo »

JS-Elcano wrote: Mon Aug 01, 2022 6:06 pm
Morik wrote: Mon Aug 01, 2022 4:48 pm
JS-Elcano wrote: Mon Aug 01, 2022 4:04 pm I am considering TLH for the first time and have a question. If I sell VXUS (international ex-US ETF) and buy VTI (total stock ETF) while already having VTI, is it a wash sale?
Wash sales require a sale of the security in question. If you sell VXUS for a loss, you can't claim the loss (it 'washes') if you purchased VXUS (or a substantially identical security) within the 30 days (not including day of sale) before the sale, or 30 days (not including day of sale) after the sale. There is some additional nuance if the purchased # of shares doesn't line up with the sold # of shares--you only 'wash' the loss on the number of shares up to the # you purchased.
But a purchase of a different security (that isn't 'substantially identical') will not wash away a realized loss from the sale of some other security.
Great! Thank you for the clear explantion.
Okay, while we are at it:
Can I TLH VXUS in 2 separate taxable accounts, joint and individual, into IXUS as long as the 30 days before and after rules are observed? Do I need to do it on the same day? I'm having a hard time thinking this thru. Can someone walk me through the logic?

If the joint account is expected to be used up in retirement, starting about 5 years away, is there a reason to not TLH so the cost basis is not lower and then when sold later will generate more tax? Or can we even know, be reasonably certain, since the tax rate in retirement is most likely going to be less than now (unless, of course, tax rates rise which they could)?
Morik
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Joined: Tue Nov 25, 2014 12:26 pm

Re: What's the big deal on TLH

Post by Morik »

Elmo wrote: Mon Aug 01, 2022 8:06 pm
JS-Elcano wrote: Mon Aug 01, 2022 6:06 pm
Morik wrote: Mon Aug 01, 2022 4:48 pm
JS-Elcano wrote: Mon Aug 01, 2022 4:04 pm I am considering TLH for the first time and have a question. If I sell VXUS (international ex-US ETF) and buy VTI (total stock ETF) while already having VTI, is it a wash sale?
Wash sales require a sale of the security in question. If you sell VXUS for a loss, you can't claim the loss (it 'washes') if you purchased VXUS (or a substantially identical security) within the 30 days (not including day of sale) before the sale, or 30 days (not including day of sale) after the sale. There is some additional nuance if the purchased # of shares doesn't line up with the sold # of shares--you only 'wash' the loss on the number of shares up to the # you purchased.
But a purchase of a different security (that isn't 'substantially identical') will not wash away a realized loss from the sale of some other security.
Great! Thank you for the clear explantion.
Okay, while we are at it:
Can I TLH VXUS in 2 separate taxable accounts, joint and individual, into IXUS as long as the 30 days before and after rules are observed? Do I need to do it on the same day? I'm having a hard time thinking this thru. Can someone walk me through the logic?

If the joint account is expected to be used up in retirement, starting about 5 years away, is there a reason to not TLH so the cost basis is not lower and then when sold later will generate more tax? Or can we even know, be reasonably certain, since the tax rate in retirement is most likely going to be less than now (unless, of course, tax rates rise which they could)?
Personally I would not consider VXUS substantially identical to IXUS because they track different indices.
But i'm not sure that is what you are asking.

Here is the way to avoid a wash sale with the same or substantially identical securities. It requires being out of the market for some time though (or if you do invest in something that isn't similar, may require holding that long term or realizing capital gains on it):
- Find the last date on which you purchased any of that security in any taxable or IRA account (and 401k account maybe... I don't look there, IRS guidance only mentions IRAs, some people prefer to be extra cautious and may also look at their 401k). This includes any dividends that were reinvested!
- Wait until that date is 30 days ago (not counting today). If any purchases happen while you are waiting, reset the clock. You can turn off dividend reinvestment to ensure no purchases get made.
- Sell the asset.
- Wait until 30 days after the sale (not including the date of the sale). Make sure you don't reinvest dividends or otherwise make any purchases of the security. (If you do, the # of shares you buy will wash against an equal number of shares you sold for a loss.)
- Purchase the asset again.

Here is the way to avoid a wash sale using what are commonly called 'TLH partners'--assets that behave similarly enough to each other that you are willing to hold either one, long term, in your portfolio and it will fulfill the same role for you. E.g., VXUS & IXUS might be considered TLH partners since they are very similar to each other but track different indices.
- Find the last date on which you purchased any of that security (VXUS) in any taxable or IRA account (and 401k account maybe... I don't look there, IRS guidance only mentions IRAs, some people prefer to be extra cautious and may also look at their 401k). This includes any dividends that were reinvested!
- Wait until that date is 30 days ago (not counting today). If any purchases happen while you are waiting, reset the clock. You can turn off dividend reinvestment to ensure no purchases get made.
- Sell the asset, in this case VXUS.
- Immediately purchase the TLH partner asset, IXUS.
- Ensure you don't purchase any VXUS for 30 days after the sale (not including the date of the sale).

Thats it--now you hold IXUS instead of VXUS. Over time you may end up holding some of both.
E.g., you buy 50 shares of VXUS for $10. Later you buy another 50 shares for $15. Later (more than 30 days later) the price falls to $12 and you TLH, selling the 50 shares with $15 cost basis, netting a $150 loss.
You buy 50*$12 = $600 worth of IXUS, say at $20 per share, so 30 shares.
Now you have 30 shares of IXUS and 50 shares of VXUS. For future purchases (after the 30 day window for VXUS, any time for IXUS) you can choose which one to purchase more of.

Note that you should be prepared to hold the TLH partner for the long term--if the price keeps going up and you wanted to switch back to the first asset you will have to take capital gains which will offset the benefit of doing TLH.
Of course, if the price drops further and the 30 day window is up, you can TLH back into the first asset.
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FrugalInvestor
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Re: What's the big deal on TLH

Post by FrugalInvestor »

Early retirees on or planning to be on ACA health insurance should also consider the possible benefit of TLH for reducing health insurance costs. TLH reduces income which reduces taxes and can also considerabley reduce health insurance premiums, especially if a person's primary source of early retirement income is from a taxable account invested in a very tax efficient investment like Vanguard Total Stock Market Fund.
Have a plan, stay the course and simplify. Then ignore the noise!
toddthebod
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Re: What's the big deal on TLH

Post by toddthebod »

Elmo wrote: Mon Aug 01, 2022 8:06 pm
Okay, while we are at it:
Can I TLH VXUS in 2 separate taxable accounts, joint and individual, into IXUS as long as the 30 days before and after rules are observed? Do I need to do it on the same day? I'm having a hard time thinking this thru. Can someone walk me through the logic?
No issues. Wash sales happen when you buy shares of the security you sold (or are about to sell). There's no issue with selling other shares of the same fund.
international001
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Re: What's the big deal on TLH

Post by international001 »

lazynovice wrote: Sun Jul 31, 2022 9:44 pm
international001 wrote: Sun Jul 31, 2022 6:41 pm Still, let's not forget that you can only offset $3k of income over the years. If you have big losses, TLH are useless.
Unlike you are planning to sell some other securities anyway (I am, for instance, since I have some individual stocks I want to get rid off)
If you ever plan to draw from your taxable account, which most people do, large losses are not useless.
That's a good point.
But for the international angle, if you retire outside US, it may not be true.
Elmo
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Re: What's the big deal on TLH

Post by Elmo »

toddthebod wrote: Mon Aug 01, 2022 11:36 pm
Elmo wrote: Mon Aug 01, 2022 8:06 pm
Okay, while we are at it:
Can I TLH VXUS in 2 separate taxable accounts, joint and individual, into IXUS as long as the 30 days before and after rules are observed? Do I need to do it on the same day? I'm having a hard time thinking this thru. Can someone walk me through the logic?
No issues. Wash sales happen when you buy shares of the security you sold (or are about to sell). There's no issue with selling other shares of the same fund.
Thank you for confirming this for me.
Elmo
Posts: 20
Joined: Wed Mar 25, 2020 1:57 pm

Re: What's the big deal on TLH

Post by Elmo »

Morik wrote: Mon Aug 01, 2022 10:19 pm
Elmo wrote: Mon Aug 01, 2022 8:06 pm
JS-Elcano wrote: Mon Aug 01, 2022 6:06 pm
Morik wrote: Mon Aug 01, 2022 4:48 pm
JS-Elcano wrote: Mon Aug 01, 2022 4:04 pm I am considering TLH for the first time and have a question. If I sell VXUS (international ex-US ETF) and buy VTI (total stock ETF) while already having VTI, is it a wash sale?
Wash sales require a sale of the security in question. If you sell VXUS for a loss, you can't claim the loss (it 'washes') if you purchased VXUS (or a substantially identical security) within the 30 days (not including day of sale) before the sale, or 30 days (not including day of sale) after the sale. There is some additional nuance if the purchased # of shares doesn't line up with the sold # of shares--you only 'wash' the loss on the number of shares up to the # you purchased.
But a purchase of a different security (that isn't 'substantially identical') will not wash away a realized loss from the sale of some other security.
Great! Thank you for the clear explantion.
Okay, while we are at it:
Can I TLH VXUS in 2 separate taxable accounts, joint and individual, into IXUS as long as the 30 days before and after rules are observed? Do I need to do it on the same day? I'm having a hard time thinking this thru. Can someone walk me through the logic?

If the joint account is expected to be used up in retirement, starting about 5 years away, is there a reason to not TLH so the cost basis is not lower and then when sold later will generate more tax? Or can we even know, be reasonably certain, since the tax rate in retirement is most likely going to be less than now (unless, of course, tax rates rise which they could)?
Personally I would not consider VXUS substantially identical to IXUS because they track different indices.
But i'm not sure that is what you are asking.

Here is the way to avoid a wash sale with the same or substantially identical securities. It requires being out of the market for some time though (or if you do invest in something that isn't similar, may require holding that long term or realizing capital gains on it):
- Find the last date on which you purchased any of that security in any taxable or IRA account (and 401k account maybe... I don't look there, IRS guidance only mentions IRAs, some people prefer to be extra cautious and may also look at their 401k). This includes any dividends that were reinvested!
- Wait until that date is 30 days ago (not counting today). If any purchases happen while you are waiting, reset the clock. You can turn off dividend reinvestment to ensure no purchases get made.
- Sell the asset.
- Wait until 30 days after the sale (not including the date of the sale). Make sure you don't reinvest dividends or otherwise make any purchases of the security. (If you do, the # of shares you buy will wash against an equal number of shares you sold for a loss.)
- Purchase the asset again.

Here is the way to avoid a wash sale using what are commonly called 'TLH partners'--assets that behave similarly enough to each other that you are willing to hold either one, long term, in your portfolio and it will fulfill the same role for you. E.g., VXUS & IXUS might be considered TLH partners since they are very similar to each other but track different indices.
- Find the last date on which you purchased any of that security (VXUS) in any taxable or IRA account (and 401k account maybe... I don't look there, IRS guidance only mentions IRAs, some people prefer to be extra cautious and may also look at their 401k). This includes any dividends that were reinvested!
- Wait until that date is 30 days ago (not counting today). If any purchases happen while you are waiting, reset the clock. You can turn off dividend reinvestment to ensure no purchases get made.
- Sell the asset, in this case VXUS.
- Immediately purchase the TLH partner asset, IXUS.
- Ensure you don't purchase any VXUS for 30 days after the sale (not including the date of the sale).

Thats it--now you hold IXUS instead of VXUS. Over time you may end up holding some of both.
E.g., you buy 50 shares of VXUS for $10. Later you buy another 50 shares for $15. Later (more than 30 days later) the price falls to $12 and you TLH, selling the 50 shares with $15 cost basis, netting a $150 loss.
You buy 50*$12 = $600 worth of IXUS, say at $20 per share, so 30 shares.
Now you have 30 shares of IXUS and 50 shares of VXUS. For future purchases (after the 30 day window for VXUS, any time for IXUS) you can choose which one to purchase more of.

Note that you should be prepared to hold the TLH partner for the long term--if the price keeps going up and you wanted to switch back to the first asset you will have to take capital gains which will offset the benefit of doing TLH.
Of course, if the price drops further and the 30 day window is up, you can TLH back into the first asset.
Thank you Morik, I know that took you some time to write out and I appreciate it. It is getting clearer each time I think it through and envision doing it.
Elmo
Posts: 20
Joined: Wed Mar 25, 2020 1:57 pm

Re: What's the big deal on TLH

Post by Elmo »

Elmo wrote: Mon Aug 01, 2022 8:06 pm
JS-Elcano wrote: Mon Aug 01, 2022 6:06 pm
Morik wrote: Mon Aug 01, 2022 4:48 pm
JS-Elcano wrote: Mon Aug 01, 2022 4:04 pm I am considering TLH for the first time and have a question. If I sell VXUS (international ex-US ETF) and buy VTI (total stock ETF) while already having VTI, is it a wash sale?
Wash sales require a sale of the security in question. If you sell VXUS for a loss, you can't claim the loss (it 'washes') if you purchased VXUS (or a substantially identical security) within the 30 days (not including day of sale) before the sale, or 30 days (not including day of sale) after the sale. There is some additional nuance if the purchased # of shares doesn't line up with the sold # of shares--you only 'wash' the loss on the number of shares up to the # you purchased.
But a purchase of a different security (that isn't 'substantially identical') will not wash away a realized loss from the sale of some other security.
Great! Thank you for the clear explantion.
Okay, while we are at it:
Can I TLH VXUS in 2 separate taxable accounts, joint and individual, into IXUS as long as the 30 days before and after rules are observed? Do I need to do it on the same day? I'm having a hard time thinking this thru. Can someone walk me through the logic?

If the joint account is expected to be used up in retirement, starting about 5 years away, is there a reason to not TLH so the cost basis is not lower and then when sold later will generate more tax? Or can we even know, be reasonably certain, since the tax rate in retirement is most likely going to be less than now (unless, of course, tax rates rise which they could)?
Anyone care to take a stab at the last paragraph that, as far as I can tell, has not been weighed in on?
Morik
Posts: 1038
Joined: Tue Nov 25, 2014 12:26 pm

Re: What's the big deal on TLH

Post by Morik »

Elmo wrote: Wed Aug 03, 2022 1:04 pm
Elmo wrote: Mon Aug 01, 2022 8:06 pm If the joint account is expected to be used up in retirement, starting about 5 years away, is there a reason to not TLH so the cost basis is not lower and then when sold later will generate more tax? Or can we even know, be reasonably certain, since the tax rate in retirement is most likely going to be less than now (unless, of course, tax rates rise which they could)?
Anyone care to take a stab at the last paragraph that, as far as I can tell, has not been weighed in on?
(Edited quote--the first quote is the 'last paragraph' referred to in the outer quote)

A couple considerations:
- If your tax rates are the same later and you TLH but don't reinvest the tax rebate you are shifting (future) money out of your account in exchange for more money now.
- If your tax rate is low enough in retirement that you pay 0% LTCG, then it probably makes sense to TLH even if you aren't going to reinvest the tax rebate. I say 'probably' because there are other things you can do with your low tax rate. E.g., roth conversions. Doing those will push your income up though so if you want to do both you'd need to make sure you aren't pushing yourself into the 15% LTCG bracket.
- If you are going to reinvest the tax rebate, I would lean towards TLH. You can do out the math on different scenarios (different investment growth rates). I haven't done out the math but I'd think a 0% growth rate would break even TLH vs no-TLH, and any positive growth rate you should come out ahead. (< 0% growth favors no TLH, the same way that < 0% growth would favor investing less money rather than more)
VanGar+Goyle
Posts: 285
Joined: Sat May 29, 2021 1:31 pm

Re: What's the big deal on TLH

Post by VanGar+Goyle »

FrugalInvestor wrote: Mon Aug 01, 2022 10:39 pm Early retirees on or planning to be on ACA health insurance should also consider the possible benefit of TLH for reducing health insurance costs. TLH reduces income which reduces taxes and can also considerabley reduce health insurance premiums, especially if a person's primary source of early retirement income is from a taxable account invested in a very tax efficient investment like Vanguard Total Stock Market Fund.
Yes, TLH is an easy way to lower AGI late in the year.
Tax deductable IRA and HSA contributions can also help, but there are limitations.
What else can you do to lower AGI in a day?
international001
Posts: 2400
Joined: Thu Feb 15, 2018 7:31 pm

Re: What's the big deal on TLH

Post by international001 »

Another consideration
What if you sell a security (with losses) and you buy it back 31+ days later.
You are just shifting your AA a bit for those 31 days. Not a big deal if the amount you are selling is small vs your overall portfolio
jocdoc
Posts: 139
Joined: Wed Oct 30, 2013 5:29 am

Re: What's the big deal on TLH

Post by jocdoc »

i was looking into TLH and robo advisors with TLH vs direct indexing.
Their cost has always dissuaded me from jumping in.

This article below suggests that TLH benefits is less than advertised and a buy and hold tax efficient portfolio may be as good as a TLH strategy. (note: direct indexing is not specifically and separately evaluated in this article.

https://alphaarchitect.com/2019/04/buye ... -benefits/

JC
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