TLH for absolute dummies [Tax Loss Harvesting]

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Roothy
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TLH for absolute dummies [Tax Loss Harvesting]

Post by Roothy » Wed Aug 26, 2015 9:57 am

Tax Loss Harvesting is a confusing topic for the beginner, but it doesn't have to require a lot of work, especially if you are willing to sacrifice optimization for simplicity. Specifically, you can ignore the timing of dividend or capital gains distributions, you can buy and sell into funds with the same company (like Vanguard, or Fidelity or whatever), and, if you are a newish investor and all the shares in your Fund have lost value, then you don't need to worry about using "specific id" as your cost-basis (for now). You can avoid even more complexity if you don't rebuy for 61 days (Vanguard) or 91 days (Fidelity) in order to avoid the risk of paying a fee for too-frequent trading in a Fund. (Other companies might have other frequency-of-trading restrictions--but 91 days should cover the vast majority.)

There is some potential complexity you *cannot* avoid, however. If you have funds in more than one company, or in retirement accounts, you need to consider the possibility they will interfere with your TLH, as described below.

Here is a step-by-step guide for executing a tax loss harvest.

TERMS: Call the fund in which you have losses you want to harvest the Initial Fund. Call the fund into which you are moving the Alternate Fund.

Step 0:
IGNORE THIS STEP FOR NOW if you are a newish investor whose Initial Fund currently has a cost-basis method of "average cost" and you show losses in the Fund as a whole. Otherwise, go to your Account Settings in your Initial Fund and change the cost-basis method to "specific identification" of share lots. Note that this will take a day or two for the company to process. If you've previously sold shares from this fund before, then the remaining (old) shares will continue be treated as having one average cost. Only the new purchases will be priced individually. If you have never sold shares of this fund before, then all of your purchases since 2012 should be separated into lots and priced individually. If they are separated into individual lots, but they still show the same average cost after the switch to Specific ID, then your broker is Vanguard and you need to call and ask them to finish the job. (This seems to be a computer glitch and hopefully will be fixed soon.)

Why use "specific ID" instead of "average cost" going forward? It allows you to sell only those shares that have suffered a loss, which will result in more tax savings (and will increase the opportunities for you to TLH, since you don't have to wait for the entire Fund to go negative--which hopefully doesn't happen very often, especially after you've been investing awhile!). However, this switch *does* introduce complexity into the equation: after a partial sale of the Initial Fund to TLH, you will now own both the Initial Fund *and* the Alternate Fund simultaneously. This means that at the end of 31 days, if the market has gone up and you choose to keep the Alternate Fund to avoid paying short term capital gains taxes, well... you now have one more Fund to keep track of in your portfolio. And if the price does go down in the Alternate fund, it will also have gone down in the Initial Fund (since by design they are highly correlated). So now you would be in a position to TLH in *both* of these accounts... what new Alternate Fund do you select as the "new home" of the losing share lots from each fund? You'll need to find another highly correlated, but not "substantially identical," Alternate Fund that you'd be happy to hold long term. And so on.

Step 1:
In your account settings, switch from "automatically reinvest" dividends and capital gains, to depositing them into a Money Market fund at the same company. You can reinvest them 31 days after you tax loss harvest.

Ideally, you should not do your first tax loss harvest until at least 30 days have passed since your last purchase into the Initial Fund--that includes automatic payments, or reinvested dividends and capital gain distributions. But for simplicity, and if you aren't willing to wait, TLH anyway. In the future, especially if you've permanently shut off automatic (re)investments, you can try to make sure that you make no purchases for 30 days before you TLH. What happens if you have a purchase within that window? It's no big deal--it just means an equal amount of "harvested" losses will simply be disallowed as wash sales.

Step 2:
If you have any new money being automatically deposited into your Initial Fund(s), turn this off--you don't want to accidentally buy shares in the Initial Fund for 31 days.

Step 3:
Beware if you have other accounts with substantially identical Funds, as these might trigger wash sales. If there are "substantially identical" funds in either your *or your spouse's* other *taxable* accounts, you will definitely risk triggering wash sales. Any substantially identical Funds in you or your spouse's *IRAs* (Roth or traditional) will also risk triggering wash sales. However, substantially identical Funds held in employer-controlled tax advantaged accounts (like 401(k)s, 403(b)s, or 457(b)s) probably will *not*. Probably. There has been no explicit guidance on this issue from the IRS and there are differences of opinion on bogleheads. Many bogleheads go ahead and TLH without worrying about the risk of triggering wash sales from whatever they holding in their employer-sponsored tax-advantaged accounts. But if you want to be super safe, make sure that any Funds in your other accounts (*all* of them) are not substantially identical to those in your taxable accounts that you are about to TLH; then you will ensure no conflicts (but you will also be adding some complication and work). Another safe move is to discontinue automatic investments into these tax-advantaged accounts for 30 days before and 31 days after the TLH--but for obvious reasons, for most people this is not a reasonable solution.

So what counts as a "substantially identical " fund? The IRS has also failed to give good guidance on that, but see Step 4 for some basic advice.

Step 4:
In the simplest case, sell your entire position in the Initial Fund, and buy the Alternate Fund. More complex case: if you have "specific id" of lots and only some of your lots are in the red, then sell the ones that register losses but not those that have registered gains, and buy the Alternate Fund. Make sure this is done the same day (one easy one to ensure it: pressing the "exchange" button instead of doing a separate "buy" versus "sell"). Hold the Alternate Fund for 31 days (or more--if the market goes up, you might be staying in the Alternate Fund for a year in order to avoid paying short term capital gains if you switch back, or even forever if you never want to pay long term capital gains).

Some good exchanges (including vice versa) for funds in Vanguard:

VTSAX, VTSMX --> VLCAX or VFIAX or VLACX (Note: Holding VSMAX and VLACX at 12%/88% ratio approximates Total Stock Market. Useful if you end up keeping the Alternate Fund for the long haul.)
VTIAX, VGTSX --> VFWAX
VGTSX (Total International Stock Index) --> VFWAX (FTSE All-World ex-US Index Fund)
VBTLX --> VBIIX

The guidelines are that if the Initial Fund and the Alternate Fund track different indices (even if the indices themselves are highly correlated), they are not "substantially identical." How about if they track the same index, but are in different companies? Arguably, they are not "substantially identical," because they have different managers, different expense ratios, and probably at least a few different stocks. On the other hand, they might also be substantially identical, since these differences might be fairly meaningless when it comes to returns and risk. Again, the IRS has not told us. Google "tax loss harvest" and the names of the funds you are buying and selling, and you'll probably find more suggestions than the above.

Step 5:
If the Alternate Fund has stayed flat or gone down, then sell the Alternate Fund, then (re)buy Initial Fund on Day 31 or later. Note: rebuying is optional. You should obviously do it if the Alternate Fund has gone down and you sold 100% of your position in the Initial Fund at Step 4--then you get to TLH again back into the Initial Fund (just make sure you don't buy any more in the Alternate Fund for 31 days!). If the Alternate Fund has gone up substantially, though, you might want to stay in the Alternate Fund for a year (or forever) in order to avoid paying short term capital gains tax. (Make sure, therefore, that the Alternate Fund is one you could live with long term.) What, though, if you sold only part of your position in the Initial Fund? Now you own both it and the Alternate Fund, and *both* will have gone down. If you want to fully TLH again, you need to find a *third* fund that is highly correlated with the Initial and Alternate, but not "substantially identical" to anything else you own. Then just wash, rinse, repeat.

Step 6:
Switch back to automatic reinvestment of dividends and capital gains (or not. If you're going to be a tax loss farmer you should probably leave it off). Switch back to automatic investments of new money (or not--again, your choice--but if you want to avoid problems, leave it off).

That's it! You can get fancier when you learn more. This thread will give you lots of guidance, including directing you to the appropriate IRS publications: viewtopic.php?f=1&t=25268&newpost=2604938.
Last edited by Roothy on Fri Aug 28, 2015 3:33 pm, edited 45 times in total.

Roothy
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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 1:41 pm

Also: Do I just "exchange" the one funds for the other, and thus get the same day's end-of-day prices for each? I'd rather not have to sell Day 1 and buy Day 2, because I don't want to introduce any more risk into the process.

Thanks.

The Wizard
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Re: TLH for absolute dummies

Post by The Wizard » Wed Aug 26, 2015 2:02 pm

Better to not auto reinvest CGs and dividends at all.
Take them in cash and just invest bigger sums where needed.

And yes, exchange from one fund to the other on VG website...
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JaySayms
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Re: TLH for absolute dummies

Post by JaySayms » Wed Aug 26, 2015 2:14 pm

The Wizard wrote:Better to not auto reinvest CGs and dividends at all.
Take them in cash and just invest bigger sums where needed.

And yes, exchange from one fund to the other on VG website...


does the cost basis need to be spec ID if you sell the all shares (Does average cost mean you have essentially 1 tax lot?)?

rkhusky
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Re: TLH for absolute dummies

Post by rkhusky » Wed Aug 26, 2015 2:29 pm

The Wizard wrote:And yes, exchange from one fund to the other on VG website...


Just a quibble, but you don't "exchange" funds, you sell one fund and buy another fund. Selling in a taxable account can have tax consequences.

The Wizard
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Re: TLH for absolute dummies

Post by The Wizard » Wed Aug 26, 2015 2:35 pm

JaySayms wrote:
The Wizard wrote:Better to not auto reinvest CGs and dividends at all.
Take them in cash and just invest bigger sums where needed.

And yes, exchange from one fund to the other on VG website...


does the cost basis need to be spec ID if you sell the all shares (Does average cost mean you have essentially 1 tax lot?)?

No, you can still TLH using avg cost method.
They still track your basis so you can compute your loss.
Better to do spec id going fwd though...
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The Wizard
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Re: TLH for absolute dummies

Post by The Wizard » Wed Aug 26, 2015 2:42 pm

rkhusky wrote:
The Wizard wrote:And yes, exchange from one fund to the other on VG website...


Just a quibble, but you don't "exchange" funds, you sell one fund and buy another fund. Selling in a taxable account can have tax consequences.

But as it turns out, "Exchange" is the exact term Vanguard uses on its website/app.
You enter the old and new funds and BANG, it happens as one apparent transaction...
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Roothy
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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 2:44 pm

rkhusky wrote:
The Wizard wrote:And yes, exchange from one fund to the other on VG website...


Just a quibble, but you don't "exchange" funds, you sell one fund and buy another fund. Selling in a taxable account can have tax consequences.


Do does that mean you recommend *not* pressing the "exchange" button, but instead pressing "sell"? Does it matter? Someone also said something like "make sure you denominate it in dollars, not shares." This has thrown me for a loop--how can I know the dollar amount, until the close of business, at which point placing the order is too late? I was assuming I'd just "exchange" 100% of the shares into the new fund. But now I'm rethinking--do I just exchange (that is, sell then buy into alternate) the lots that have a loss? Is it a problem that I'd still own some of the first fund?

tdonline
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Re: TLH for absolute dummies

Post by tdonline » Wed Aug 26, 2015 2:47 pm

I just exchanged VTIAX for VFWAX--all shares. I selected the SpecId option but Vanguard wouldn't allow me to do it. So I just exchanged everything as first in first out. Did I mess up?

The Wizard
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Re: TLH for absolute dummies

Post by The Wizard » Wed Aug 26, 2015 2:53 pm

tdonline wrote:I just exchanged VTIAX for VFWAX--all shares. I selected the SpecId option but Vanguard wouldn't allow me to do it. So I just exchanged everything as first in first out. Did I mess up?

You did just fine, but today is a significant UP day, so less loss than if done yesterday...
Last edited by The Wizard on Wed Aug 26, 2015 2:57 pm, edited 1 time in total.
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The Wizard
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Re: TLH for absolute dummies

Post by The Wizard » Wed Aug 26, 2015 2:56 pm

Roothy wrote:
rkhusky wrote:
The Wizard wrote:And yes, exchange from one fund to the other on VG website...


Just a quibble, but you don't "exchange" funds, you sell one fund and buy another fund. Selling in a taxable account can have tax consequences.


Do does that mean you recommend *not* pressing the "exchange" button, but instead pressing "sell"? Does it matter? Someone also said something like "make sure you denominate it in dollars, not shares." This has thrown me for a loop--how can I know the dollar amount, until the close of business, at which point placing the order is too late? I was assuming I'd just "exchange" 100% of the shares into the new fund. But now I'm rethinking--do I just exchange (that is, sell then buy into alternate) the lots that have a loss? Is it a problem that I'd still own some of the first fund?

No.
Use the Exchange function on the VG site.
And I think there's an option for All Shares, so use that if that's what you want...
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Roothy
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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 3:01 pm

The Wizard wrote:
tdonline wrote:I just exchanged VTIAX for VFWAX--all shares. I selected the SpecId option but Vanguard wouldn't allow me to do it. So I just exchanged everything as first in first out. Did I mess up?

You did just fine, but today is a significant UP day, so less loss than if done yesterday...


So say it goes down again by a big number tomorrow. Can s/he TLH again tomorrow (into, say, a third fund or cash), or does s/he have to wait 61 days?

ved
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Re: TLH for absolute dummies

Post by ved » Wed Aug 26, 2015 3:08 pm

Roothy wrote: though I have sizable tax-deferred accounts at Fidelity (403(b) and 457(b) and T.Rowe (457(b)--no IRAs), which I understand I don't need to worry about--correct?


if your tax-deferred accounts @ Fidelity, etc. contain the same fund that you are selling from taxable @ Vanguard, then the same wash sale rules apply. You want to make sure that you turn-off the dividend re-investment and that the near-future contributions (next 30 days) are not going into the same fund @ your tax-deferred accounts. Also, if you purchased some of the same fund in the past 30 days in the tax deferred account (Fidelity), then those are "replacement" shares and would trigger wash-sale rules for the fund you are selling in your taxable (Vanguard)

To make matters more complicated, even your spouse's taxable/ tax-deferred accounts holding should be considered when evaluating wash-sale in your taxable.

In essence, if you are selling Fund A in your taxable for TLH purposes, ensure that you did not purchase Fund A in any of your/ your spouse's accounts (taxable and tax-deferred) in the last 30 days or in the next 30 days to avoid wash-sale rules.
But, as livesoft (thank you) repeatedly pointed out, it is not illegal to have wash-sale. You just don't get to immediately lock the losses, you get to increase the cost basis of the replacement shares.

The Wizard
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Re: TLH for absolute dummies

Post by The Wizard » Wed Aug 26, 2015 3:09 pm

Roothy wrote:
The Wizard wrote:
tdonline wrote:I just exchanged VTIAX for VFWAX--all shares. I selected the SpecId option but Vanguard wouldn't allow me to do it. So I just exchanged everything as first in first out. Did I mess up?

You did just fine, but today is a significant UP day, so less loss than if done yesterday...


So say it goes down again by a big number tomorrow. Can s/he TLH again tomorrow (into, say, a third fund or cash), or does s/he have to wait 61 days?

There's another thread on this point that covers it well...
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retiredjg
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Re: TLH for absolute dummies

Post by retiredjg » Wed Aug 26, 2015 3:13 pm

Step 3:
Sell current funds, buy alternate funds. Make sure this is done the same day (one easy one to ensure it: pressing the "exchange" button instead of doing a separate "buy" versus "sell"). Hold for 61 days.

Step 4:
Sell alternate funds, (re)buy current funds on Day 61.

There is no 61 days after the sale. Only 30 (or is it 31?) days after the sale. The 61 days includes 30 days before and 30 days after you harvest the loss.

Do not assume you will be going back to your original funds. If the market continues to go down, you get to make a "round trip" and get back to the funds you started with. If the market goes up after you buy your substitute shares, if you sell, you'll have a gain which will eat up your losses.

So pick something you are willing to live with for a long time.

Edited: I just realized you may have been talking about the Vanguard frequent trading rules, not the wash sale rules. You can get rebuy at Vanguard after 30 days if you do it in writing.
Last edited by retiredjg on Wed Aug 26, 2015 3:23 pm, edited 1 time in total.

Roothy
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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 3:14 pm

ved wrote:
Roothy wrote: though I have sizable tax-deferred accounts at Fidelity (403(b) and 457(b) and T.Rowe (457(b)--no IRAs), which I understand I don't need to worry about--correct?


if your tax-deferred accounts @ Fidelity, etc. contain the same fund that you are selling from taxable @ Vanguard, then the same wash sale rules apply. You want to make sure that you turn-off the dividend re-investment and that the near-future contributions (next 30 days) are not going into the same fund @ your tax-deferred accounts. Also, if you purchased some of the same fund in the past 30 days in the tax deferred account (Fidelity), then those are "replacement" shares and would trigger wash-sale rules for the fund you are selling in your taxable (Vanguard)

To make matters more complicated, even your spouse's taxable/ tax-deferred accounts holding should be considered when evaluating wash-sale in your taxable.

In essence, if you are selling Fund A in your taxable for TLH purposes, ensure that you did not purchase Fund A in any of your/ your spouse's accounts (taxable and tax-deferred) in the last 30 days or in the next 30 days to avoid wash-sale rules.
But, as livesoft (thank you) repeatedly pointed out, it is not illegal to have wash-sale. You just don't get to immediately lock the losses, you get to increase the cost basis of the replacement shares.


Ugh. Thank you. When you say "if your tax-deferred accounts @ Fidelity, etc. contain the same fund that you are selling from taxable @ Vanguard, then the same wash sale rules apply," do you mean literally the same fund? So, for instance, if I have a Fidelity index fund that tracks the S&P 500 in the tax-deferred account, but the taxable fund in which I want to realize losses is a *Vanguard* fund that tracks the S&P 500, I wouldn't have to worry? Or do I have to worry about it since they are "substantially similar" despite being owned by different companies?

Thanks, too, for the clarification re: legality.

Roothy
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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 3:19 pm

retiredjg wrote:
Step 3:
Sell current funds, buy alternate funds. Make sure this is done the same day (one easy one to ensure it: pressing the "exchange" button instead of doing a separate "buy" versus "sell"). Hold for 61 days.

Step 4:
Sell alternate funds, (re)buy current funds on Day 61.

There is no 61 days after the sale. Only 30 (or is it 31?) days after the sale. The 61 days includes 30 days before and 30 days after you harvest the loss.

Do not assume you will be going back to your original funds. If the market continues to go down, you get to make a "round trip" and get back to the funds you started with. If the market goes up after you buy your substitute shares, if you sell, you'll have a gain which will eat up your losses.

So pick something you are willing to live with for a long time.


Thank you. The 61 days is more a response to Vanguard apparently having some rule about buying out of and back into a fund too frequently. So they have a 61 day rule to discourage "day trading," essentially. That's why I went with 61 days--I just don't want to have to think about it. But now you have me concerned re: "30 days before." I was not looking at account activity in the *prior* 30 days. What am I supposed to be looking for in the prior 30 days?

Anyway, this is tremendously helpful. I am pming with JaySams who is as confused as me, and together, we are trying to rewrite the "Steps" in the original post so that any other newbies can find all this detail out in one place. I, for one, have been reading about TLH, off and on, for about a year, and I can't find a single place where are the details are put together in one easy reader format, with "how to" steps. So I hope this thread eventually helps many others, not just the two of us...

ved
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Re: TLH for absolute dummies

Post by ved » Wed Aug 26, 2015 3:20 pm

I am a newbie at this too, but I have one TLH from yesterday under my belt :)

The fund in tax-deferred doesn't have to be the exact same fund that you are TLHing in taxable...a "substantially identical" fund would also trigger wash-sale, if you had purchases in the 30 days prior to TLH or 30 days after TLH.

More experienced folks may say something different.

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Re: TLH for absolute dummies

Post by retiredjg » Wed Aug 26, 2015 3:26 pm

Roothy wrote:Thank you. The 61 days is more a response to Vanguard apparently having some rule about buying out of and back into a fund too frequently. So they have a 61 day rule to discourage "day trading," essentially.

Yes, that did occur to me after I typed it. Edited above.

Have you looked in the Wiki for more information? Yes, 30 days before….

Roothy
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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 3:36 pm

retiredjg wrote:
Roothy wrote:Thank you. The 61 days is more a response to Vanguard apparently having some rule about buying out of and back into a fund too frequently. So they have a 61 day rule to discourage "day trading," essentially.

Yes, that did occur to me after I typed it. Edited above.

Have you looked in the Wiki for more information? Yes, 30 days before….


Yes, I have read it twice, and countless threads on this! :) Still not sure what the 30 day before is, but there was a lot of information there. So you are saying that if I have *purchased* any of the Initial Fund (in which I have harvestable losses) within 30 days, I need to wait for 30 days to pass? Or if I have "sold* any of the Initial Fund within 30 days, I need to wait 30 days to pass? I didn't put this in the steps because I'm assuming--perhaps wrongly--that most boglehead types will have deposits, but not withdrawals, from funds they want to TLH...

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Re: TLH for absolute dummies

Post by retiredjg » Wed Aug 26, 2015 3:41 pm


Roothy
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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 3:49 pm



Thank you, very helpful. This language, though, now has me doubting whether the game is worth the candle:

"There is no ruling on whether two funds operated by different companies tracking the same index are substantially identical; tax experts have differing opinions. ... You can ...reduce the risk of wash sales with your IRA or 401(k) by not holding substantially identical funds there and in your taxable account; if you have an S&P 500 index in your 401(k), you can hold Vanguard Total Stock Market or Vanguard Large Cap Index instead of Vanguard 500 Index Fund in your taxable account."

Several of the old guard on this site claim TLH takes two minutes and is as easy as the click of a couple of buttons. I'm finding that not to be so... especially not if I have to take all of my 403(b) and 457(b) holdings and exchange *those* into something else, too, just to avoid a wash sale. This is especially hard where the retirement plan does not have all of these options--I've already picked the best of the lot in the retirement funds, and I can't just pick an alternate fund tracking a similar index. (I think this limit on choices is very common.) I also don't want to move my 403(b)s and 457(b)s from a former job to a Vanguard IRA, because I want to keep the option of backdoor Roths in the future. I'm kind of surprised TLH is as common as it is, given the conflicts with tax-deferred funds that you've pointed out.
Last edited by Roothy on Wed Aug 26, 2015 3:54 pm, edited 1 time in total.

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GreatOdinsRaven
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Re: TLH for absolute dummies

Post by GreatOdinsRaven » Wed Aug 26, 2015 3:53 pm

retiredjg wrote:Edited: I just realized you may have been talking about the Vanguard frequent trading rules, not the wash sale rules. You can get rebuy at Vanguard after 30 days if you do it in writing.


In my experience after waiting 31 days you can use automatic exchanges to reinvest as well.

Actually, in addition to written orders you could still use automatic exchanges, today, to reinvest without being locked out by Vanguard due to frequent trading. But doing so without waiting 31 days would result in a wash sale.
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Roothy
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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 3:55 pm

GreatOdinsRaven wrote:
retiredjg wrote:Edited: I just realized you may have been talking about the Vanguard frequent trading rules, not the wash sale rules. You can get rebuy at Vanguard after 30 days if you do it in writing.


In my experience after waiting 31 days you can use automatic exchanges to reinvest as well.

Actually, in addition to written orders you could still use automatic exchanges, today, to reinvest without being locked out by Vanguard due to frequent trading. But doing so without waiting 31 days would result in a wash sale.


Right. But to make the process easier, it's better to just wait 61 days and not have to worry about any of it. (Again, it might not be optimal--but it's good enough.)

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Re: TLH for absolute dummies

Post by tdonline » Wed Aug 26, 2015 4:16 pm

The Wizard wrote:
tdonline wrote:I just exchanged VTIAX for VFWAX--all shares. I selected the SpecId option but Vanguard wouldn't allow me to do it. So I just exchanged everything as first in first out. Did I mess up?

You did just fine, but today is a significant UP day, so less loss than if done yesterday...


I dithered yesterday and missed the 4pm deadline. I was on the fence about doing it today but went for it. I figured I could use the TLH experience and possible 600-700 in tax savings would still be worth it. Not a big win, but it may be worth the learning experience. It could go up again tomorrow...

nolapepper
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Re: TLH for absolute dummies

Post by nolapepper » Wed Aug 26, 2015 4:44 pm

From what I have read, If your fidelity fund tracks sp500 and vanguard fund also tracks SP500, then they should be substantially identical and will trigger wash sale if timing is not right.

retiredjg
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Re: TLH for absolute dummies

Post by retiredjg » Wed Aug 26, 2015 4:46 pm

Roothy wrote:Several of the old guard on this site claim TLH takes two minutes and is as easy as the click of a couple of buttons. I'm finding that not to be so... especially not if I have to take all of my 403(b) and 457(b) holdings and exchange *those* into something else, too, just to avoid a wash sale.

If I were you, I'd keep learning and sit this round out. This is not a subject to try to figure out quickly.

For people who already understand this and who have set up their portfolios so that TLH can be done at a moment's notice…it probably does take 2 minutes. The first few times? Nothing like 2 minutes.

There is a question about whether your 403b or 457b is even involved. I just started a thread on that - look for it. Moving old stuff to IRA would not help because there is a definite IRS ruling that your IRA and your spouse's IRA are involved when deciding if a wash sale exists.

Roothy
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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 4:46 pm

nolapepper wrote:From what I have read, If your fidelity fund tracks sp500 and vanguard fund also tracks SP500, then they should be substantially identical and will trigger wash sale if timing is not right.


I've read that this is unclear--the IRS has given no guidance. Am I wrong, and they *have* decided now?

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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 4:48 pm

retiredjg wrote:
Roothy wrote:Several of the old guard on this site claim TLH takes two minutes and is as easy as the click of a couple of buttons. I'm finding that not to be so... especially not if I have to take all of my 403(b) and 457(b) holdings and exchange *those* into something else, too, just to avoid a wash sale.

If I were you, I'd keep learning and sit this round out. This is not a subject to try to figure out quickly.

For people who already understand this and who have set up their portfolios so that TLH can be done at a moment's notice…it probably does take 2 minutes. The first few times? Nothing like 2 minutes.

There is a question about whether your 403b or 457b is even involved. I just started a thread on that - look for it. Moving old stuff to IRA would not help because there is a definite IRS ruling that your IRA and your spouse's IRA are involved when deciding if a wash sale exists.


Oh believe me, I know it is complicated. And believe it or not, I've been researching it on and off for months. I do know about the IRS ruling on IRAs. But I understood that there *is* no ruling on employer-sponsored plans. I will try to find the thread you cited.

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Re: TLH for absolute dummies

Post by retiredjg » Wed Aug 26, 2015 4:51 pm

nolapepper wrote:From what I have read, If your fidelity fund tracks sp500 and vanguard fund also tracks SP500, then they should be substantially identical and will trigger wash sale if timing is not right.

There are differing opinions even on this.

Yes, two funds tracking the same index will be very similar. But some people believe "substantially identical" has nothing to do with being similar - they believe it has to do with who the shareholders are, who is on the board of directors, who the fund managers are, etc.

People have lined up on both sides of this aisle and neither the IRS nor the courts have bothered to enlighten us.

It's the Wild West all over again. :D

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Re: TLH for absolute dummies

Post by lowerleisureclass » Wed Aug 26, 2015 5:05 pm

retiredjg wrote:
Roothy wrote:Several of the old guard on this site claim TLH takes two minutes and is as easy as the click of a couple of buttons. I'm finding that not to be so... especially not if I have to take all of my 403(b) and 457(b) holdings and exchange *those* into something else, too, just to avoid a wash sale.

If I were you, I'd keep learning and sit this round out. This is not a subject to try to figure out quickly.

For people who already understand this and who have set up their portfolios so that TLH can be done at a moment's notice…it probably does take 2 minutes. The first few times? Nothing like 2 minutes.

There is a question about whether your 403b or 457b is even involved. I just started a thread on that - look for it. Moving old stuff to IRA would not help because there is a definite IRS ruling that your IRA and your spouse's IRA are involved when deciding if a wash sale exists.



Thank you. I'm not the OP, but I too have been reading through the wiki and all these threads, having just figured out this might be something that could benefit me, not just people rolling in six-figure incomes.

However, given that I have VG Total Intl in my taxable, Fidelity Spartan Intl index in a rollover 401K, and VG Total Intl ETF in my Roth (not even getting into the VWO and VEU my spouse has in a couple of accounts), trying to get to a point where it would be possible to TLH the taxable Total International for the VG FTSE EX US for seems like something that would consume weeks of effort, and which I would probably *still* get wrong at the end. A couple of clicks it would not be. I always suspected "it just takes a minute!" really means "it just takes a minute after you spend years educating yourself about all the ins and outs and pitfalls," and the more I read the more I that seems like the case. I think I'm going to offer to buy lunch for my securities fraud trial lawyer friend soon and pepper HIM with questions.
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Re: TLH for absolute dummies

Post by ray.james » Wed Aug 26, 2015 5:07 pm

Have learnt so much from this thread. Preventing wash sale seems pretty complicated when you include 1 taxable, 1 401k, 2 roth and then roll over accounts :(
I am lucky my wife uses only TR funds. I might as well use just TR funds in all retirement vehicles, so they reach the bond allocation I want overall. Then I can TLH taxable as I like more easily.
Last edited by ray.james on Wed Aug 26, 2015 5:19 pm, edited 1 time in total.
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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 5:15 pm

I am revising the "Steps" as I get feedback (and learn more from places people direct me).

I wouldn't give up so quickly on TLH if the potential conflicts reside in employer-sponsored accounts (where you have a limited set of funds to select from)--the IRS has not said these could trigger wash sales, and there's logic to their not. If on the other hand the conflicts reside in an IRA--yours or your spouse's--then yeah, you have problems unless you want to do a lot of futzing. If the conflicts reside in a tax-advatanged NON IRA (like a solo-401(k), then I guess I'd be somewhat cautious, but probably would be likely to treat them like employer-sponsored plans for purposes of predicting how the IRS will treat them.

If we don't have to worry about employer-sponsored plans, then it really DOES seem easy (see my Steps--really not that onerous), even if not "two minutes and two clicks."

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Re: TLH for absolute dummies

Post by JaySayms » Wed Aug 26, 2015 6:59 pm

For what it's worth here is the response email I received from Betterment (gasp!) when I asked them to look over my 401k and tell me if they could TLH a taxable account with them.

Thanks for sending us your existing investments. Unfortunately we would not be able to evaluate these securities to see if they would be problematic to have when utilizing our TLH+ algorithm. Betterment is not a tax advisor and thus we are prohibited from giving this sort of specific tax advice.

In general, you’ll want to avoid investing in any passive ETFs or mutual funds that track the same index as the funds in our portfolios. You can check the indexes of our investments here.

The key issue is to protect yourself from inadvertently triggering a wash sale while harvesting a loss in your Betterment account. This could happen when making certain purchases in an external account.

The IRS’s wash sale rule prevents you from realizing a loss from selling a security if a “substantially identical” security is purchased by the taxpayer 30 days after or before the sale. The rationale is that a taxpayer should not enjoy the benefit of deducting a loss if he or she did not truly dispose of the security, but in effect replaced it.

TLH+ will automatically manage your purchases when they are made inside your Betterment taxable account, as well as your Betterment IRA.

Target date funds, actively managed funds and individual stocks are generally not problematic to use alongside our TLH+ algorithm. To read more about using TLH+ with external accounts, please see our guide here.

If you have any other questions or inquiries that we can assist you with, please let us know. Thank you for being a Betterment customer, and have a wonderful day.


In my case, my 401k is all actively managed funds (it's a trust and I have no control over the assets). So for TLH purposes, it may be a "win" for me. Same would be true of Target date funds (which I find odd since they include the very same funds that most of us are trying to TLH)......

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Re: TLH for absolute dummies

Post by siamond » Wed Aug 26, 2015 7:02 pm

Roothy, I like what you're doing. Ultimately, this could find its way in the Wiki page, which seems a bit lacking in specifics and clarity, given the number of TLH threads floating around...

You do need to capture the case of a Buy in the 30 days *before* the Sell though. A deliberate Buy or maybe an automated one (e.g. dividends reinvestment). This would trigger a wash sale UNLESS you sold the precise lot that was recently bought. At least, this is my understanding, but I'm no TLH expert... I actually screwed up my 1st attempt at TLH because of this precise situation!

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by LadyGeek » Wed Aug 26, 2015 7:30 pm

This thread is now in the Investing - Theory, News & General forum (theory). I retitled the thread to help with the acronyms.

siamond wrote:Roothy, I like what you're doing. Ultimately, this could find its way in the Wiki page, which seems a bit lacking in specifics and clarity, given the number of TLH threads floating around...

Challenge accepted. Here's the wiki page: Tax loss harvesting

What needs to be changed?

===========

The link in human readable format*: Wash sale

Does anything need to be changed here?

*Geeks can read the link without additional formatting.
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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by siamond » Wed Aug 26, 2015 7:56 pm

LadyGeek wrote:This thread is now in the Investing - Theory, News & General forum (theory). I retitled the thread to help with the acronyms.

siamond wrote:Roothy, I like what you're doing. Ultimately, this could find its way in the Wiki page, which seems a bit lacking in specifics and clarity, given the number of TLH threads floating around...

Challenge accepted. Here's the wiki page: Tax loss harvesting

What needs to be changed?

LOL, I knew you would rise to the challenge, just didn't expect you to be that fast...

My own comment was more about the Wash Sale page, actually. Although I would start by suggesting that both pages should include an explicit link to the other, actually. The TLH page has a link to an external wash-sale page, but not to the wiki Wash Sale page. The Wash Sale page doesn't mention the TLH page. Enticing the readers to study both pages would probably help them get things right.

About the Wash Sale page, I'm hesitant to suggest wording as I don't master the topic well enough, but the Buy/Sell sequence, although described, may not be clear enough, notably the idea of selling the 'replacement shares' as mitigation for a recent Buy. The words are there, but personally, I understood them AFTER getting the point by reading something else!

Anyhoo, besides those point comments, my overarching point was to possibly use Roothy's step-by-step idea in the Wiki page once it has matured enough, as an example (not a mandate!) of a reliable process.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by LadyGeek » Wed Aug 26, 2015 8:56 pm

I updated the wiki so the pages link to each other. Look under the "See also" section: Wash sale

Until things settle out, I've also linked back to this thread from: Tax loss harvesting ("External links")

This is a collaborative effort, all wiki editors are welcome to edit the pages directly. Members can post suggestions here (or in Suggestions for the Wiki).
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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 10:04 pm

JaySayms wrote:For what it's worth here is the response email I received from Betterment (gasp!) when I asked them to look over my 401k and tell me if they could TLH a taxable account with them.

..."In general, you’ll want to avoid investing in any passive ETFs or mutual funds that track the same index as the funds in our portfolios. You can check the indexes of our investments here. The key issue is to protect yourself from inadvertently triggering a wash sale while harvesting a loss in your Betterment account. This could happen when making certain purchases in an external account. ... TLH+ will automatically manage your purchases when they are made inside your Betterment taxable account, as well as your Betterment IRA. ... To read more about using TLH+ with external accounts, please see our guide here."

...


Interesting. In other words, they are TLH assuming that the only funds you own are the ones in Betterment? I wonder how many people understand that, and understand that they might be running afoul of the wash sale rule when Betterment buys/sells "substantially similar" Funds from what they have in accounts *outside* Betterment. I suspect many people who get audited are going to face a nasty surprise. It sounds like it is essentially caveat emptor.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Roothy » Wed Aug 26, 2015 10:06 pm

LadyGeek wrote:This thread is now in the Investing - Theory, News & General forum (theory). I retitled the thread to help with the acronyms.

siamond wrote:Roothy, I like what you're doing. Ultimately, this could find its way in the Wiki page, which seems a bit lacking in specifics and clarity, given the number of TLH threads floating around...

Challenge accepted. Here's the wiki page: Tax loss harvesting

What needs to be changed?


Thank you, LadyGeek and siamond. I guess what I should do is continue to work out the "Steps," and then submit it to the recommendations page for the wiki.

If those of you who actually know what you are talking about (unlike, say, me) would take a look at the Steps as I've written them and answer the remaining questions I have, or tell me where I am wrong, I would be very grateful.
Last edited by Roothy on Wed Aug 26, 2015 10:41 pm, edited 1 time in total.

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Re: TLH for absolute dummies

Post by Roothy » Wed Aug 26, 2015 10:08 pm

siamond wrote:Roothy, I like what you're doing. Ultimately, this could find its way in the Wiki page, which seems a bit lacking in specifics and clarity, given the number of TLH threads floating around...

You do need to capture the case of a Buy in the 30 days *before* the Sell though. A deliberate Buy or maybe an automated one (e.g. dividends reinvestment). This would trigger a wash sale UNLESS you sold the precise lot that was recently bought. At least, this is my understanding, but I'm no TLH expert... I actually screwed up my 1st attempt at TLH because of this precise situation!


Yes, I hadn't thought of that. Looks like "automatic reinvestment" causes many little devilish problems. I've changed the Steps to reflect your concerns; let me know if I need to refine/fix.

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Re: TLH for absolute dummies

Post by JaySayms » Wed Aug 26, 2015 11:44 pm

Roothy wrote:
JaySayms wrote:For what it's worth here is the response email I received from Betterment (gasp!) when I asked them to look over my 401k and tell me if they could TLH a taxable account with them.

..."In general, you’ll want to avoid investing in any passive ETFs or mutual funds that track the same index as the funds in our portfolios. You can check the indexes of our investments here. The key issue is to protect yourself from inadvertently triggering a wash sale while harvesting a loss in your Betterment account. This could happen when making certain purchases in an external account. ... TLH+ will automatically manage your purchases when they are made inside your Betterment taxable account, as well as your Betterment IRA. ... To read more about using TLH+ with external accounts, please see our guide here."

...


Interesting. In other words, they are TLH assuming that the only funds you own are the ones in Betterment? I wonder how many people understand that, and understand that they might be running afoul of the wash sale rule when Betterment buys/sells "substantially similar" Funds from what they have in accounts *outside* Betterment. I suspect many people who get audited are going to face a nasty surprise. It sounds like it is essentially caveat emptor.


What they're saying is that if you go with Betterment, you need to do your own research on your own holdings to make sure a wash sale will not happen. They know their clients have retirement portfolios outside of Betterment, but they put the onus on you to figure out if TLH is possible for you. You would have to design your entire portfolio around their holdings so as to not hold anything that is substantially equivalent to the funds they hold, or their alternative funds. Because they TLH constantly, you can't work around that by stopping direct deposit or the like. These actions only work if you DIY the whole process. They do provide a basic guide for deciding if your holdings are substantially identical or not. It does not seem clear cut, nor do I know how long the IRS is going to allow such practices.

Personally I think that if you hold passive index funds in your retirement accounts that attempt to capture the entire market (very bogle-ish), it's going to be very difficult to use a service like betterment. Whether you can do it yourself or not is a matter the level of complexity you are willing to take on. A further question is how much TLH'ing you will want to do on your own? IMO it is not worth trying to keep up with a roboadvisor in terms of frequency but rather to focus on true market corrections and end of the year tax savings. Other than that I feel that for me, this is getting away from the passive, set and forget four fund approach I was looking for.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by retiredjg » Thu Aug 27, 2015 7:25 am

It should be noted that you can use Betterment without using their TLH+ service. I assume that is true for the other robos as well.

They are not going to take responsibility for your wash sales. They tell you up front what to do to avoid it and they even go so far as to include work plans in the accounts that might cause a wash sale - something that may not even be necessary.

My recommendation is to not use Betterment's TLH+ service (or let another robo do the same) if you plan to do some TLH'ing yourself in another taxable account that is not under their management. And you'd have to be real careful if you use 2 different robos in the family - their funds might overlap.

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Re: TLH for absolute dummies

Post by bpg1234 » Thu Aug 27, 2015 8:08 am

GreatOdinsRaven wrote:
retiredjg wrote:Edited: I just realized you may have been talking about the Vanguard frequent trading rules, not the wash sale rules. You can get rebuy at Vanguard after 30 days if you do it in writing.


In my experience after waiting 31 days you can use automatic exchanges to reinvest as well.

Actually, in addition to written orders you could still use automatic exchanges, today, to reinvest without being locked out by Vanguard due to frequent trading. But doing so without waiting 31 days would result in a wash sale.

Automatic exchanges apparently don't work (at least yet) with Vanguard if you "elected" to have your mutual fund account changed to the brokerage account they have been rolling out. I recently tried to use this approach to bypass the 60 day Vanguard frequent trading restriction and received an error message as such.

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Re: TLH for absolute dummies

Post by packet » Thu Aug 27, 2015 9:01 am

retiredjg wrote:
nolapepper wrote:From what I have read, If your fidelity fund tracks sp500 and vanguard fund also tracks SP500, then they should be substantially identical and will trigger wash sale if timing is not right.

There are differing opinions even on this....

I, not being an authority on the subject by any means, look at it like this... if I were the IRS making the decision, which way would I go?

The S&P 500 Index determines which equities and what percentages thereof are included. Any fund that attempts to mimic the index... would be, "substantially identical".

Also, if I were the IRS, I would look at ALL of your accounts... only makes sense to me.

Just my 2c.

:beerCheers,
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Re: TLH for absolute dummies

Post by JaySayms » Thu Aug 27, 2015 10:07 am

packet wrote:
retiredjg wrote:
nolapepper wrote:From what I have read, If your fidelity fund tracks sp500 and vanguard fund also tracks SP500, then they should be substantially identical and will trigger wash sale if timing is not right.

There are differing opinions even on this....

I, not being an authority on the subject by any means, look at it like this... if I were the IRS making the decision, which way would I go?

The S&P 500 Index determines which equities and what percentages thereof are included. Any fund that attempts to mimic the index... would be, "substantially identical".

Also, if I were the IRS, I would look at ALL of your accounts... only makes sense to me.

Just my 2c.

:beerCheers,
packet



Agreed on the 401k plans as well. While the IRS has not specified that deposits to funds in a 401k plan will trigger a wash sale elsewhere, it stands to reason that they have the flexibility to interpret their own rules in this way and will likely not let you get away with this for long.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by qwerty123 » Thu Aug 27, 2015 10:21 am

LadyGeek wrote:This thread is now in the Investing - Theory, News & General forum (theory). I retitled the thread to help with the acronyms.

siamond wrote:Roothy, I like what you're doing. Ultimately, this could find its way in the Wiki page, which seems a bit lacking in specifics and clarity, given the number of TLH threads floating around...

Challenge accepted. Here's the wiki page: Tax loss harvesting

What needs to be changed?

===========

The link in human readable format*: Wash sale

Does anything need to be changed here?

*Geeks can read the link without additional formatting.


A reference to the fact that "you do not need to worry about wash sales if you liquidate all of your shares of a given investment and you do not repurchase substantially identical securities within 30 days" would be helpful, assuming this is actually accurate (I found a reference to it on another site). Actually, can anyone confirm that this is accurate?

Basically, this means that you don't have to worry about purchases that occurred before selling, as long as you sell all of your holdings of that stock. For example, I have VTIAX shares, and all of them have losses, so I'm planning on selling them all. This would not be a wash sale even if I purchased some shares a few days ago, as long as I am selling all of them.

I also think it would be helpful to have more clarity on the "Short-term capital loss due to tax-exempt interest" regulatory point, since I'm still confused on that (but I am fairly sure it doesn't apply to me).

Overall, that page was really helpful though, it just took a bit of studying and reading to figure most things out.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Roothy » Thu Aug 27, 2015 11:08 am

qwerty123 wrote:
A reference to the fact that "you do not need to worry about wash sales if you liquidate all of your shares of a given investment and you do not repurchase substantially identical securities within 30 days" would be helpful, assuming this is actually accurate (I found a reference to it on another site). Actually, can anyone confirm that this is accurate?

Basically, this means that you don't have to worry about purchases that occurred before selling, as long as you sell all of your holdings of that stock. For example, I have VTIAX shares, and all of them have losses, so I'm planning on selling them all. This would not be a wash sale even if I purchased some shares a few days ago, as long as I am selling all of them.

I also think it would be helpful to have more clarity on the "Short-term capital loss due to tax-exempt interest" regulatory point, since I'm still confused on that (but I am fairly sure it doesn't apply to me).

Overall, that page was really helpful though, it just took a bit of studying and reading to figure most things out.


Yes, I'd like to know the answers to that. Re: your point about selling them all--I think that's right, UNLESS of course you have kept some shares in a "substatially similar" fund in another account (possibly even your 401(k). So (possibly) the Fidelity all stock market index fund, should you have made any deposits within 30 days (and many would have, if they owned it, as many with 401(k)s deposit additional funds monthly), would trigger a wash sale with your liquidation of VTIAX.

Re: the short-term capital loss due to tax exempt interest point... ugh. Yet another thing I have absolutely no idea about.

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by Minsc » Thu Aug 27, 2015 12:49 pm

Thanks for the post it is helpful to my noob self. I have a question though.

Say I tax loss harvested VTIAX and bought VFWAX in my taxable account. I also have VTIAX in my Roth, which is going to get a dividend in September. I should turn off the reinvestment option on the VTIAX in my Roth? Is it ok to have that dividend from VTIAX go to another of my funds say Total US?

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Re: TLH for absolute dummies [Tax Loss Harvesting]

Post by siamond » Thu Aug 27, 2015 1:05 pm

Minsc wrote:Say I tax loss harvested VTIAX and bought VFWAX in my taxable account. I also have VTIAX in my Roth, which is going to get a dividend in September. I should turn off the reinvestment option on the VTIAX in my Roth? Is it ok to have that dividend from VTIAX go to another of my funds say Total US?

Yes and yes

(if you don't do that, the IRS would see the dividends reinvestment as 'replacement shares'; a bit silly if you ask me, but that's the way it works)

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