When to Tax Loss Harvest?

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MrCheapo
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When to Tax Loss Harvest?

Post by MrCheapo »

Are there is a set of conditions (like whether to invest in a Roth or tIRA based on pre/post retirement tax rates) to determine when one should tax harvest?

My current situation is:

a) Made losses in some stocks in a Roth IRA so no point tax harvesting given its all tax free growth.
b) Have several poorly performing stocks in an after-tax account but I have the money to pay my taxes on the stocks that did do well so again no need to tax harvest.

I'm reaching the (wrong?) conclusion that one tax harvests if they are generating too much taxable income AND they don't have the means to pay the tax. Is that right?
Last edited by MrCheapo on Thu Dec 02, 2021 6:28 pm, edited 1 time in total.
pizzy
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Re: When to Tax Harvest?

Post by pizzy »

People TLH to offset gains whether they have the money to pay the tax or not. Why pay tax you don't have to?
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sycamore
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Re: When to Tax Harvest?

Post by sycamore »

Note: your subject line only says "Tax Harvest" but one can tax loss harvest or tax gain harvest. It helps to be specific :)
MrCheapo wrote: Thu Dec 02, 2021 2:45 pm I'm reaching the (wrong?) conclusion that one tax harvests if they are generating too much taxable income AND they don't have the means to pay the tax. Is that right?
That may be one reason some people TLH but it's not the only one.
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Mullins
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Re: When to Tax Harvest?

Post by Mullins »

MrCheapo wrote: Thu Dec 02, 2021 2:45 pm b) Have several poorly performing stocks in an after-tax account but I have the money to pay my taxes on the stocks that did do well so again no need to tax harvest.

I'm reaching the (wrong?) conclusion that one tax harvests if they are generating too much taxable income AND they don't have the means to pay the tax. Is that right?
You are reaching an incorrect conclusion. One tax loss harvests if they wish to minimize their tax obligation AND even if they have the means to pay the tax. You have the right to pay the least amount of tax legally possible.
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MrCheapo
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Re: When to Tax Harvest?

Post by MrCheapo »

Mullins wrote: Thu Dec 02, 2021 3:23 pm
MrCheapo wrote: Thu Dec 02, 2021 2:45 pm b) Have several poorly performing stocks in an after-tax account but I have the money to pay my taxes on the stocks that did do well so again no need to tax harvest.

I'm reaching the (wrong?) conclusion that one tax harvests if they are generating too much taxable income AND they don't have the means to pay the tax. Is that right?
You are reaching an incorrect conclusion. One tax loss harvests if they wish to minimize their tax obligation AND even if they have the means to pay the tax. You have the right to pay the least amount of tax legally possible.
Okay. But this assumes the stock will always go down. So then why not wait till it goes to 0 and maxmize the tax loss?
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Re: When to Tax Harvest?

Post by pizzy »

MrCheapo wrote: Thu Dec 02, 2021 6:27 pm
Mullins wrote: Thu Dec 02, 2021 3:23 pm
MrCheapo wrote: Thu Dec 02, 2021 2:45 pm b) Have several poorly performing stocks in an after-tax account but I have the money to pay my taxes on the stocks that did do well so again no need to tax harvest.

I'm reaching the (wrong?) conclusion that one tax harvests if they are generating too much taxable income AND they don't have the means to pay the tax. Is that right?
You are reaching an incorrect conclusion. One tax loss harvests if they wish to minimize their tax obligation AND even if they have the means to pay the tax. You have the right to pay the least amount of tax legally possible.
Okay. But this assumes the stock will always go down. So then why not wait till it goes to 0 and maximize the tax loss?
Maybe you are missing the part of TLH where you buy a "similar" ETF/MF back immediately with the proceeds.
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Re: When to Tax Harvest?

Post by grabiner »

MrCheapo wrote: Thu Dec 02, 2021 6:27 pm
Mullins wrote: Thu Dec 02, 2021 3:23 pm
MrCheapo wrote: Thu Dec 02, 2021 2:45 pm b) Have several poorly performing stocks in an after-tax account but I have the money to pay my taxes on the stocks that did do well so again no need to tax harvest.

I'm reaching the (wrong?) conclusion that one tax harvests if they are generating too much taxable income AND they don't have the means to pay the tax. Is that right?
You are reaching an incorrect conclusion. One tax loss harvests if they wish to minimize their tax obligation AND even if they have the means to pay the tax. You have the right to pay the least amount of tax legally possible.
Okay. But this assumes the stock will always go down. So then why not wait till it goes to 0 and maxmize the tax loss?
You don't buy a stock that you expect to go down. However, stocks do go down, just less often than they go up.

And you don't miss out on the option to harvest the larger loss. If you bought a stock fund for $10K, and it drops to $9K, you can harvest that loss and use the $9K to buy another stock fund. If the market drops further and your new fund drops to $8K, you can harvest the second $1K loss, and buy into still another stock fund (or back into the first fund if it has been at least 31 days). If the market rises and the new fund becomes worth $10K, you have just as much as if you had stayed in the first fund, and have the $1K to take off your taxes.
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Doctor Rhythm
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Re: When to Tax Loss Harvest?

Post by Doctor Rhythm »

MrCheapo wrote: Thu Dec 02, 2021 2:45 pm Are there is a set of conditions (like whether to invest in a Roth or tIRA based on pre/post retirement tax rates) to determine when one should tax harvest?

My current situation is:

a) Made losses in some stocks in a Roth IRA so no point tax harvesting given its all tax free growth.
b) Have several poorly performing stocks in an after-tax account but I have the money to pay my taxes on the stocks that did do well so again no need to tax harvest.

I'm reaching the (wrong?) conclusion that one tax harvests if they are generating too much taxable income AND they don't have the means to pay the tax. Is that right?
In situation (a), it's not that there's no point in TLH, but rather it's that you can't tax loss harvest in a retirement account. You don't receive a deduction from realizing capital losses in a retirement account, so there's no harvest to be had.

In situation (b), this is exactly the scenario where tax loss harvesting in beneficial. You have undesired stocks/funds that have an unrealized capital loss. Bummer! But, now you can sell them at a loss and use the proceeds to buy a total stock index fund. As a result, your total stock allocation is unchanged (stocks are exchanged for stocks), but you now have better investments, and the loss can be used as a deduction against any capital gains you might incur now or in the future. Net capital losses of up to $3000 per year can be applied against your income.

https://www.investopedia.com/articles/p ... x-bill.asp
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MrCheapo
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Re: When to Tax Loss Harvest?

Post by MrCheapo »

But here's what I don't understand about your statement which I have bolded.

If the aim is to maximize the loss then why not wait for the stock to go even lower and sell when it goes to $0. I can only see that the benefit is to sell NOW because you want to minimize your tax bill NOW. But as I said, I have enough for my tax bill.
Doctor Rhythm wrote: Thu Dec 02, 2021 10:25 pm
MrCheapo wrote: Thu Dec 02, 2021 2:45 pm Are there is a set of conditions (like whether to invest in a Roth or tIRA based on pre/post retirement tax rates) to determine when one should tax harvest?

My current situation is:

a) Made losses in some stocks in a Roth IRA so no point tax harvesting given its all tax free growth.
b) Have several poorly performing stocks in an after-tax account but I have the money to pay my taxes on the stocks that did do well so again no need to tax harvest.

I'm reaching the (wrong?) conclusion that one tax harvests if they are generating too much taxable income AND they don't have the means to pay the tax. Is that right?
In situation (a), it's not that there's no point in TLH, but rather it's that you can't tax loss harvest in a retirement account. You don't receive a deduction from realizing capital losses in a retirement account, so there's no harvest to be had.

In situation (b), this is exactly the scenario where tax loss harvesting in beneficial. You have undesired stocks/funds that have an unrealized capital loss. Bummer! But, now you can sell them at a loss and use the proceeds to buy a total stock index fund. As a result, your total stock allocation is unchanged (stocks are exchanged for stocks), but you now have better investments, and the loss can be used as a deduction against any capital gains you might incur now or in the future. Net capital losses of up to $3000 per year can be applied against your income.

https://www.investopedia.com/articles/p ... x-bill.asp
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Re: When to Tax Loss Harvest?

Post by Doctor Rhythm »

MrCheapo wrote: Sat Dec 04, 2021 11:28 am But here's what I don't understand about your statement which I have bolded.

If the aim is to maximize the loss then why not wait for the stock to go even lower and sell when it goes to $0. I can only see that the benefit is to sell NOW because you want to minimize your tax bill NOW. But as I said, I have enough for my tax bill.
Doctor Rhythm wrote: Thu Dec 02, 2021 10:25 pm . . .
In situation (b), this is exactly the scenario where tax loss harvesting in beneficial. You have undesired stocks/funds that have an unrealized capital loss. Bummer! But, now you can sell them at a loss and use the proceeds to buy a total stock index fund. As a result, your total stock allocation is unchanged (stocks are exchanged for stocks), but you now have better investments, and the loss can be used as a deduction against any capital gains you might incur now or in the future. Net capital losses of up to $3000 per year can be applied against your income.

https://www.investopedia.com/articles/p ... x-bill.asp
Have you had a chance to read the article at the link above or read the wiki page on TLH here? It’s a slightly complicated topic, which is why there are so many posts and questions about it on the forum.

The parts of your post I’ve highlighted are incorrect assumptions. I’ll make a few points:

1. I am incapable of predicting future price movements of my investments. I would posit that you are too, since you wouldn’t have bought those stocks if you had a strong suspicion they would be current losers. Therefore, you don’t know whether they will continue to decline, let alone “drop to zero”. But let’s say you truly believe it will continue to fall. If so, why would you wait to sell until you’ve lost everything? Imagine you bought a $100K stock investment that has declined by 50%. Sell now, and what you’ll have left is $50K + [your tax rate x $50K]. Wait until it goes to zero, and what you’ll have left is [your tax rate x $100K]. Which would you prefer? The aim is NOT to maximize the amount of the tax loss harvest, but to keep the most money after taxes.

1a. For index investors, future price doesn’t matter. The movement of both the old fund being sold and new fund being bought move in parallel, so if they drop further, you can just tax loss harvest in the reverse direction back into the original fund. Read about wash sales, though.

2. Unused capital loss carry over to future tax years. This is important, because it makes TLH beneficial even if you don’t have any current capital gains. In fact, that’s the best case scenario, because $3000 of the net loss (read the articles for explanation of how this is calculated) can be applied against regular income yearly, and I’m guessing your income tax rate is higher than your LTCG tax rate.
Last edited by Doctor Rhythm on Sat Dec 04, 2021 1:31 pm, edited 1 time in total.
exodusNH
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Re: When to Tax Loss Harvest?

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MrCheapo wrote: Thu Dec 02, 2021 2:45 pm Are there is a set of conditions (like whether to invest in a Roth or tIRA based on pre/post retirement tax rates) to determine when one should tax harvest?

My current situation is:

a) Made losses in some stocks in a Roth IRA so no point tax harvesting given its all tax free growth.
b) Have several poorly performing stocks in an after-tax account but I have the money to pay my taxes on the stocks that did do well so again no need to tax harvest.

I'm reaching the (wrong?) conclusion that one tax harvests if they are generating too much taxable income AND they don't have the means to pay the tax. Is that right?
Be aware that tax loss harvesting defers taxes, unless you're counting on the step-up basis on death.

Each time you harvest, your basis goes down. That means whenever you do sell for profit, the capital gains will be higher.

That's not necessarily a bad thing, but it is something to be aware of.
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Re: When to Tax Loss Harvest?

Post by rkhusky »

If you know a stock is going to decline, why would you continue to hold it? If it is going to zero, sell now before you lose everything. If you know it will decline and then rebound, sell now and buy back at the bottom. These are easier said than done, unless you have special knowledge that the rest of the market doesn’t have.

Most of us wait until our taxable account shows a sufficiently large loss and then TLH. We don’t know when that sufficiently large loss will occur, if ever.
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Re: When to Tax Loss Harvest?

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rkhusky wrote: Sat Dec 04, 2021 1:46 pm If you know a stock is going to decline, why would you continue to hold it? If it is going to zero, sell now before you lose everything. If you know it will decline and then rebound, sell now and buy back at the bottom. These are easier said than done, unless you have special knowledge that the rest of the market doesn’t have.

Most of us wait until our taxable account shows a sufficiently large loss and then TLH. We don’t know when that sufficiently large loss will occur, if ever.
I look at it this way: Losing money in the market is unpleasant, but TLH is your consolation prize.

So, to answer your question, TLH when you have significantly unpleasant losses. You get to define "significantly."
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Re: When to Tax Harvest?

Post by Jack&Warren disciple »

Mullins wrote: Thu Dec 02, 2021 3:23 pm
MrCheapo wrote: Thu Dec 02, 2021 2:45 pm b) Have several poorly performing stocks in an after-tax account but I have the money to pay my taxes on the stocks that did do well so again no need to tax harvest.

I'm reaching the (wrong?) conclusion that one tax harvests if they are generating too much taxable income AND they don't have the means to pay the tax. Is that right?
You are reaching an incorrect conclusion. One tax loss harvests if they wish to minimize their tax obligation AND even if they have the means to pay the tax. You have the right to pay the least amount of tax legally possible.
That's right, here's Judge Learned Hand's famous quote: Famous Judge Learned Hand Quote
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
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Re: When to Tax Loss Harvest?

Post by grabiner »

MrCheapo wrote: Sat Dec 04, 2021 11:28 am But here's what I don't understand about your statement which I have bolded.

If the aim is to maximize the loss then why not wait for the stock to go even lower and sell when it goes to $0. I can only see that the benefit is to sell NOW because you want to minimize your tax bill NOW. But as I said, I have enough for my tax bill.
Because you don't lose the benefit, and you don't know that the stock will go down.

Suppose you have just bought $10K worth of stock in Fund A The market goes down by 20% in January, then goes either up or down by 25% in February.

First, suppose that the market goes down twice. If you don't harvest in January, you sell $6K of Fund A to buy Fund B in February, for a $4K capital loss. If you do harvest in January, you sell $8K of Fund A in January to buy Fund B, and then sell $6K of Fund B in February to buy Fund C (or back into Fund A if it has been 31 days and you prefer that fund). Either way, you have $6K in stock, and a $4K capital loss.

Now, suppose that the market goes down and back up. If you don't harvest in January, you have $10K of stock in February and no capital loss. If you harvest in January, you sell $8K of Fund A to buy Fund B, and then Fund B goes back up to $10K, so you have $10K of stock and a $2K capital loss to deduct from your taxes.

Thus, if the market continues to go down, you break even on taxes whether you harvest now or later. But if the market goes back up, you come out ahead harvesting the loss now.

And the bolded statement is another advantage, if you have a fund that you don't want to keep.
In situation (b), this is exactly the scenario where tax loss harvesting in beneficial. You have undesired stocks/funds that have an unrealized capital loss. Bummer! But, now you can sell them at a loss and use the proceeds to buy a total stock index fund.
If you harvest the loss in January, you get out of Fund A and into Fund B or Fund C, and you still come out ahead or break even in taxes. If you don't harvest the loss and the market goes back up so that you have a capital gain on Fund A, you are still stuck with Fund A.
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