How much capital losses make TLH worthwhile?

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Phatphoeater
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How much capital losses make TLH worthwhile?

Post by Phatphoeater » Wed May 26, 2010 8:11 pm

I just bought some VSS a few months ago and have a relatively small loss ($400). If there are no commission costs, should one just TLH whenever they can or is there some sort of threshold you wait for?

I have no other cap gains planned for the rest of the year if that matters.

edit: Forgot to add I'm in the 25% tax bracket.

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pjstack
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Post by pjstack » Wed May 26, 2010 8:21 pm

Probably better to wait until the loss is a year old so that it will be a long term capital loss, but since losses (long or short term) are subtracted from gains, it probably doesn't matter.
pjstack

livesoft
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Post by livesoft » Wed May 26, 2010 8:29 pm

NO! NO! NO! Never ever ever never wait for a loss to become a long term loss. Always take the loss while it is still short term.

Other than that, there is no fixed rule on the amount to harvest. It could be $1000 or 10% of the value of the position. Or something else.

However, your $400 loss is not a big deal to me, but it may be a big deal to you. I would not harvest a $400 loss until December of the current tax year or just before the loss was about to become long term. But I would harvest it.

I would harvest a loss on a big down day in the market because the volume is usually huge on those days, so lots of liquidity and you have a chance of buying replacement shares at a near-term low. A good day would've been Thursday May 20th.
Last edited by livesoft on Wed May 26, 2010 8:45 pm, edited 3 times in total.

GammaPoint
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Post by GammaPoint » Wed May 26, 2010 8:30 pm

$400 is a pretty small loss. It depends on what fraction of your investment that is (how many shares you would have to swap). If you're in the 25% bracket you'll pay, what, $100 less taxes? Depending on the bid/ask spreads and when you buy that might get wiped out, but maybe not.
pjstack wrote:Probably better to wait until the loss is a year old so that it will be a long term capital loss, but since losses (long or short term) are subtracted from gains, it probably doesn't matter.
I don't think this is true. I think it's better to take losses when they are short-term rather than long-term. In some cases it won't matter, but in some cases short-term losses will be better than long-term ones.

livesoft
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Post by livesoft » Thu May 27, 2010 7:15 am

Another thought on the threshold: If you watch your investment daily, you will get an idea of how much it moves up and down in a day or week. If the loss is within the range of a week's movement, then I would not worry about it (until December or 11.5 months after purchase). That is, if the loss is going to disappear from a normal market gain, don't worry about it.

For example, I bought VSS last week and it has a 3% loss. I am not going to harvest that loss, but if it goes to 5% or 10%, then I will have to rethink this. Or if 31 days goes by and it is still a loss, then I will sell it to purchase SCZ. I am waiting 31 days because I just sold SCZ to buy VSS (see http://www.bogleheads.org/forum/viewtopic.php?p=734655 for details on that tax-loss harvesting transaction).

VSS = small cap foreign
SCZ = small cap foreign

Phatphoeater
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Post by Phatphoeater » Thu May 27, 2010 9:50 am

Currently I'm sitting on ~10% loss. I bought it in the low $80's. It's a relatively small position in my total portfolio, but I figured any tax savings even if only $100 might be worth it. Maybe I'll pick an arbitrary %age loss and TLH then.

retiredjg
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Post by retiredjg » Thu May 27, 2010 11:19 am

livesoft wrote:NO! NO! NO! Never ever ever never wait for a loss to become a long term loss. Always take the loss while it is still short term.
Why? I sort of think I might know, but I sort of think it does not matter, so I guess I don't know....
VSS = small cap foreign
SCZ = small cap foreign
Oh thanks, you dear sweet man! :wink:

livesoft
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Post by livesoft » Thu May 27, 2010 11:40 am

retiredjg wrote:
livesoft wrote:NO! NO! NO! Never ever ever never wait for a loss to become a long term loss. Always take the loss while it is still short term.
Why? I sort of think I might know, but I sort of think it does not matter, so I guess I don't know....
Two main reasons:

1. It overcomes the behavioral finance trap of loss aversion.

2. When Schedule D is filled out, ST losses will offset ST gains first. Since ST gains are taxed at a higher rate, one should be able to offset these. The situation may arise where one has LT gains and ST gains. If you had only LT losses, the LT gains would be offset leaving you with ST gains and their higher tax rate. If you had no LT gains, then your LT losses could offset the ST gains.

Of course, we chide people not to take ST gains, but sometimes we need the flexibility to do so and thus always taking losses when they are still short term gives you a little bit more flexibility. An example of wishing to take a short-term gain: 31 days ago you did a TLH move. You wish to go back to your original investment by selling the replacement shares. These replacement shares are now valued at a small gain, so if you sold them you would incur a ST capital gain.

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Post by juliewongferra » Thu May 27, 2010 11:41 am

livesoft wrote:
NO! NO! NO! Never ever ever never wait for a loss to become a long term loss. Always take the loss while it is still short term.

Why? I sort of think I might know, but I sort of think it does not matter, so I guess I don't know....
I think it's because you can only use long term losses to negate long term gains...but you can use short term losses to negate short tmer or long term gains, so short term is more flexible.

cheers!
jwf

retiredjg
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Post by retiredjg » Thu May 27, 2010 11:47 am

Thanks to both of you for your answers. On the line of what I was thinking.

However, I would never have thought of this one.
livesoft wrote:1. It overcomes the behavioral finance trap of loss aversion.

GammaPoint
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Post by GammaPoint » Thu May 27, 2010 12:43 pm

livesoft wrote:
2. When Schedule D is filled out, ST losses will offset ST gains first. Since ST gains are taxed at a higher rate, one should be able to offset these. The situation may arise where one has LT gains and ST gains. If you had only LT losses, the LT gains would be offset leaving you with ST gains and their higher tax rate. If you had no LT gains, then your LT losses could offset the ST gains.
Yep, as Livesoft said in another thread:

livesoft wrote: A. Let's say you have $3K of ST-loss carried over from last year, and you have $5K of LTCG and $3K of STCG. You would then have $5K of LTCG taxes to pay.

B. Let's say you have $3K of LT-loss carried over from last year instead, and you have the same gains: $5K of LTCG and $3K of STCG. Now you have $2K of LTCG and $3K of STCG taxes to pay. Since the STCG tax rate is higher than the LTCG tax rate, you pay more taxes than in scenario A. Note also that AGI is the same as scenario A.

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Post by bdavidson » Thu May 27, 2010 2:00 pm

I was all ready to TLH some Vanguard FTSE All-World ex-US (VFWIX) shares on Tuesday, since I had about $4,400 in short-term losses. I was all set to pull the trigger and had Vanguard's instructions for Specific Identification of Shares, when Vanguard's website prompted me that selling my most recent lots would result in a 2% redemption fee (they were both sizable lump sums from emp stk options proceeds).

So I paused to think it over, since I hate wasting money on fees (mental accounting?). Fortunately, VFWIX has dropped further since, but redemption fees might be another factor to consider. And I see that VEU ETF is up 5% today, so VFWIX will follow suit. I may have missed my own sweet spot for TLH.

Would anyone else TLH in spite of a 2% redemption fee?

Phatphoeater
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Post by Phatphoeater » Thu May 27, 2010 2:43 pm

market volatility just made my decision simpler. made back about half of my losses on this vss position. :)

of course tomorrow, the same volatility can put me right back.

livesoft
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Post by livesoft » Thu May 27, 2010 2:55 pm

^ And I now have a nice little gain. :)

The Wizard
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Post by The Wizard » Thu May 27, 2010 3:01 pm

livesoft wrote:......I am waiting 31 days because I just sold SCZ to buy VSS (see http://www.bogleheads.org/forum/viewtopic.php?p=734655 for details on that tax-loss harvesting transaction).

VSS = small cap foreign
SCZ = small cap foreign
These are both foreign small cap funds, but one is Growth oriented while the other is Value. Therefore not a wash sale, correct?
(I'm new to TLH concepts...)

natureexplorer
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Re: How much capital losses make TLH worthwhile?

Post by natureexplorer » Thu May 27, 2010 4:25 pm

Do you have other harvested losses already?

GammaPoint
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Post by GammaPoint » Thu May 27, 2010 4:29 pm

The Wizard wrote:
These are both foreign small cap funds, but one is Growth oriented while the other is Value. Therefore not a wash sale, correct?
(I'm new to TLH concepts...)
Is one growth oriented? They're both midcap blend in the style box. They track different indexes (FTSE vs MSCI EAFE), so maybe that's good enough for a TLH.

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Post by The Wizard » Thu May 27, 2010 4:36 pm

GammaPoint wrote:
The Wizard wrote:
These are both foreign small cap funds, but one is Growth oriented while the other is Value. Therefore not a wash sale, correct?
(I'm new to TLH concepts...)
Is one growth oriented? They're both midcap blend in the style box. They track different indexes (FTSE vs MSCI EAFE), so maybe that's good enough for a TLH.
Yes, I guess you're right.
I read the Morningstar details too fast.
So Livesoft has a wash sale then, I guess, the two ETFs not substantially different?

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Post by GammaPoint » Thu May 27, 2010 4:38 pm

The Wizard wrote: So Livesoft has a wash sale then, I guess, the two ETFs not substantially different?
The IRS is vague on what is 'substantially different'. I thought tracking two different indexes might be enough. If Livesoft did it for TLH purposes, I'd bet he knows that it's okay.

natureexplorer
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Post by natureexplorer » Thu May 27, 2010 4:40 pm

Those ETFs (and their indices) are quite different. One contains emerging markets, the other doesn't. Even Vanguard FTSE ex-US and Vanguard International are okay for TLH and there the difference is only Canada (no offense to Canadians).
Last edited by natureexplorer on Thu May 27, 2010 4:48 pm, edited 1 time in total.

livesoft
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Post by livesoft » Thu May 27, 2010 4:43 pm

The IRS terminology is NOT "substantially different"; it is "substantially identical". These ETFs have different stocks in them, they cannot be "substantially identical".

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l82start
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Post by l82start » Thu May 27, 2010 5:10 pm

i am in a similar position as the op with a small loss (500$) and i am wondering if i can i TLH, my initial purchase VFWIX was the minimum (3000$) but i wouldn't have enough to make the minimum for the VGTSX now after the loss,

-so do i need to add money in order to TLH in this situation?

also there was a warning in addition to the 2% for moving back before 2 months that the fee would be applied if they liquidate it due to falling below the minimum

-do they liquidate low accounts often? under what circumstances?

"1 The 2% fee applies only if you redeem shares within two months of purchase by selling or by exchanging to another
Vanguard fund, or if Vanguard liquidates your Fund account because the balance falls below the minimum initial investment
for any reason, including market fluctuation.
Annual"
Last edited by l82start on Sat May 29, 2010 9:30 pm, edited 1 time in total.

FinanceGeek
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Post by FinanceGeek » Thu May 27, 2010 5:44 pm

I generally execute a TLH whenever I have an unrealized loss in the 5% to 10% territory or greater. I find that a loss of that magnitude is at least an order of magnitude greater than the summation of bid/ask spreads, SEC fee on the sale, and commissions (if any). I'll do it at smaller percentages if we're near the end of the year, perhaps using around 2% as an absolute floor.

Just be very careful to avoid the wash sale rule. I keep a list of 3 to 5 alternate ETFs for each of my sliced and diced portfolio components and rotate among them. Make sure your alternates follow different indices or index sampling strategies.

A further optimization is to take exDiv dates into account. Then you can choose to TLH after the distribution pushes the price of what you're buying or selling further down. I try to avoid having securities that pay large distributions in my taxable so I ignore that for the most part.
Last edited by FinanceGeek on Thu May 27, 2010 5:46 pm, edited 1 time in total.

retiredjg
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Post by retiredjg » Thu May 27, 2010 5:45 pm

livesoft wrote:These ETFs have different stocks in them, they cannot be "substantially identical".
Am I the only one around here who still believes that "substantially identical" has nothing to do with the stocks contained in the funds? I feel like such an outsider.... :cry:

The Wizard
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Post by The Wizard » Thu May 27, 2010 6:33 pm

It now seems clear to me that if two funds track different indexes or no index, then you should be able to move between them with no wash rule issues.
Compare the top 25 holdings on morningstar.com if you have concerns.

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Post by GammaPoint » Thu May 27, 2010 6:37 pm

FinanceGeek wrote:I generally execute a TLH whenever I have an unrealized loss in the 5% to 10% territory or greater. I find that a loss of that magnitude is at least an order of magnitude greater than the summation of bid/ask spreads, SEC fee on the sale, and commissions (if any). I'll do it at smaller percentages if we're near the end of the year, perhaps using around 2% as an absolute floor..
Yep. I think this sort of analysis is the way to go. If your tax rate is really high then you can benefit from lower % losses, but for someone like me in the 15% tax bracket I prefer to have a larger loss to make sure it dwarfs big/ask spreads, market movements during the TLH, etc. Although to be fair, if I invested the 15% savings I'd have at least 30 years of growth on it before I would consider selling it again, so it's probably well worth it anyway.

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Post by grabiner » Thu May 27, 2010 8:04 pm

FinanceGeek wrote:A further optimization is to take exDiv dates into account. Then you can choose to TLH after the distribution pushes the price of what you're buying or selling further down.
You want to buy after the distribution, but you may want to sell before the distribution, depending on the relative tax rates. If your ETF pays out a $1000 dividend and you sell on the ex-dividend date, you get an extra $1000 of dividends on which you pay an immediate tax, and an extra $1000 capital loss which will reduce your taxable income in some year. If the dividend is qualified and the capital loss offsets ordinary income or short-term gains this year, then you come out ahead. If the dividend is non-qualified and the capital loss offsets long-term gains this year, or if the capital loss offsets income many years in the future, then you pay more on the dividend tax than you save in the future.

If you are buying a replacement ETF with the intention of holding it 31 days, you should wait for the ex-dividend date, as any dividend on an ETF held for less than 61 days is non-qualified.
Wiki David Grabiner

GammaPoint
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Post by GammaPoint » Thu May 27, 2010 8:16 pm

grabiner wrote:
If you are buying a replacement ETF with the intention of holding it 31 days, you should wait for the ex-dividend date, as any dividend on an ETF held for less than 61 days is non-qualified.
I exchanged some VTSMX - > VTI at WellsTrade recently. I think a dividend is coming up next month. Is it possible that when WellsTrade sends me my 2010 tax info that they'll list the dividend as non-qualified? Anyone know?

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Post by livesoft » Thu May 27, 2010 8:20 pm

^No, the dividend will be qualified.

The 61 days is any 61 days including the day of the dividend. That means 60 days after or 60 days before or 30 days before and after or 40 days before and 20 days after, etc.

GammaPoint
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Post by GammaPoint » Thu May 27, 2010 8:23 pm

livesoft wrote:^No, the dividend will be qualified.

The 61 days is any 61 days including the day of the dividend. That means 60 days after or 60 days before or 30 days before and after or 40 days before and 20 days after, etc.
Ahh, I see. Thanks.

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