Minimize capital loss to reduce wash sale, or minimize capital gain?

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jimmyg
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Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by jimmyg »

Hi,

I hold several hundred shares of Vanguard FTSE Emerging Markets ETF (VWO) only in my taxable account, my most recent VWO purchase (50 shares @ $49.35) was in August, and I want to buy more VWO in my taxable account.

VWO has fluctuated between $49 and $50 for the past few days. When VWO is below $49.35 (as it is right now), I can sell those 50 shares and use the proceeds to immediately buy something "not substantially equivalent to VWO", but I don't want to hold two emerging markets funds/ETFs just to tax-loss harvest ~$5,000 ~$2,500.

1) Should I wait for VWO to go back up (closer to $49.35) and then try to sell the 50 shares at $49.34 to realize a $0.50 short-term capital loss? I might have a wash sale depending on when I buy more VWO (hopefully at a price below $49.35), but the wash sale will only be for $0.50, right?

2) Should I wait for VWO to go back up (closer to $49.35) and then try to sell the 50 shares at $49.35 or $49.36 so I have no short-term capital gain/loss or a $0.50 short-term capital gain? Then I can buy more VWO (hopefully at a price below $49.35) whenever I want.

I believe my 9/20/21 dividend on these 50 VWO shares should remain qualified since they met the 60-day qualified dividend rule.

I will likely just buy more VWO and keep holding these 50 shares since Options #1 and #2 involve market timing and I also don't want to complicate my tax return (with possible wash sales, Form 1099-B, and what not) for only ~$5,000 ~$2,500. But I don't remember reading about anyone doing what I asked above (probably because it doesn't make sense :D), and wanted to see what other Bogleheads thought about it.

Thanks for any comments or feedback!

Edit: Corrected multiplication errors. Math was never my strong suit... :(
Last edited by jimmyg on Fri Dec 03, 2021 7:37 pm, edited 1 time in total.
Shallowpockets
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by Shallowpockets »

This is 50 cents you are talking about? Is this correct? This is the wash sale you are worried about.
All this for selling in a taxable account so you can buy almost the same in a tax deferred account.
Overall though your question is about 50 cents?
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iceport
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by iceport »

I might be missing something, but it seems to me that with either Option 1 of Option 2 you would not be accomplishing a tax-loss harvest of $5k. The loss you would harvest would either be trivial or non-existent, right? So why would you sell the position for practically no purpose, only to buy it back again?

On the other hand, if there is a similar but not substantially identical fund that you could buy in a tax-advantaged account, selling fixed income to fund the purchase, then you could just sell VWO in the taxable account and hold the proceeds in fixed income for 31 days. Then you can reverse the process after the wash sale period.

The biggest downside risk would be if VWO drops a lot further in those 31 days, you would lose the opportunity for a more significant TLH.

A $5k loss would be enough for me to bother with harvesting, but everybody's different.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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jimmyg
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by jimmyg »

Shallowpockets wrote: Fri Dec 03, 2021 11:22 am This is 50 cents you are talking about? Is this correct? This is the wash sale you are worried about.
All this for selling in a taxable account so you can buy almost the same in a tax deferred account.
Overall though your question is about 50 cents?
Thanks for the response!

I was considering selling ~$5,000 ~$2,500 worth of VWO in my taxable account, re-buying that ~$5,000 ~$2,500 of VWO (and additional VWO using new money) in my taxable account at a lower price, and was trying to think of ways to minimize/avoid a wash sale. More so to avoid complicating my tax return since I've never sold ETFs before--let alone tax-loss harvested or created a wash sale. That $0.50 wash sale is the result of one of the options I thought up, but I'm not sure if it makes sense or is worth doing, so I probably won't go through with it.

Edit: Corrected multiplication errors.
Last edited by jimmyg on Fri Dec 03, 2021 7:38 pm, edited 1 time in total.
Topic Author
jimmyg
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by jimmyg »

iceport wrote: Fri Dec 03, 2021 11:36 am I might be missing something, but it seems to me that with either Option 1 of Option 2 you would not be accomplishing a tax-loss harvest of $5k. The loss you would harvest would either be trivial or non-existent, right? So why would you sell the position for practically no purpose, only to buy it back again?

On the other hand, if there is a similar but not substantially identical fund that you could buy in a tax-advantaged account, selling fixed income to fund the purchase, then you could just sell VWO in the taxable account and hold the proceeds in fixed income for 31 days. Then you can reverse the process after the wash sale period.

The biggest downside risk would be if VWO drops a lot further in those 31 days, you would lose the opportunity for a more significant TLH.

A $5k loss would be enough for me to bother with harvesting, but everybody's different.
Thanks for the response!

Yes, I was not trying to tax-loss harvest the ~$5,000 ~$2,500 in Options 1 and 2. I intended to hold the ~$5,000 ~$2,500 in cash, and wait for VWO to drop further before rebuying them (along with more VWO using new money). Basically, I regret buying those 50 shares of VWO when I did, so I wanted to sell them and rebuy them at a lower price with a minimal (or no) wash sale.

I'll most likely not sell the 50 shares since I'll probably market-time it wrong when rebuying them at a lower price, but I'll think about your other suggestions, especially the one about buying VWO's TLH partner in a tax-advantaged account. Thanks!

Edit: Corrected multiplication errors.
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Eagle33
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by Eagle33 »

jimmyg wrote: Fri Dec 03, 2021 11:51 am Yes, I was not trying to tax-loss harvest the ~$5,000 ~$2,500 in Options 1 and 2. I intended to hold the ~$5,000 ~$2,500 in cash, and wait for VWO to drop further before rebuying them (along with more VWO using new money). Basically, I regret buying those 50 shares of VWO when I did, so I wanted to sell them and rebuy them at a lower price with a minimal (or no) wash sale.

I'll most likely not sell the 50 shares since I'll probably market-time it wrong when rebuying them at a lower price, but I'll think about your other suggestions, especially the one about buying VWO's TLH partner in a tax-advantaged account. Thanks!

Edit: Corrected multiplication errors.
Whether right or wrong, you are market timing - an anti-Boglehead behavior. Soon will you become a day trader? Instead, just buy & hold until you need to re-balance back to your target AA or actually need the money for some expense.
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iceport
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by iceport »

jimmyg wrote: Fri Dec 03, 2021 11:51 am I intended to hold the ~$5,000 ~$2,500 in cash, and wait for VWO to drop further before rebuying them (along with more VWO using new money). Basically, I regret buying those 50 shares of VWO when I did, so I wanted to sell them and rebuy them at a lower price with a minimal (or no) wash sale.
jimmyg, I'm still unclear on your objective here. I can't really tell if you're trying to time the market with emerging markets, or if your choice of wording reflects a desire to lower the cost basis for the shares you had already purchased. I wouldn't advise doing either one, but wanting to own shares with a lower price makes much less sense to me than market-timing.

When folks harvest losses for tax purposes, one of the nasty unwanted side-effects is the lowering of the cost basis of the holding. A lower cost basis will result in higher capital gains when the shares are sold, and thus a higher tax liability. Lowering the cost basis and producing higher unrealized capital gains is counter-productive to the tax-loss harvesting objective of saving taxes.

When I read your posts, it almost seems as though realizing the loss for tax purposes is not your objective, but that you simply want to own emerging markets stock with a lower cost basis. Why would you want to do that?

Please excuse me if I'm misreading your posts.
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Mullins
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by Mullins »

jimmyg wrote: Fri Dec 03, 2021 11:04 am VWO has fluctuated between $49 and $50 for the past few days. When VWO is below $49.35 (as it is right now), I can sell those 50 shares and use the proceeds to immediately buy something "not substantially equivalent to VWO", but I don't want to hold two emerging markets funds/ETFs just to tax-loss harvest ~$5,000 ~$2,500.
$2500 wouldn't be the amount of the tax loss.
You have 50 shares. Price goes down to 49.35 and to you that's a 50 cents a share loss. So, if you sell the 50 shares, the total loss for tax purposes is $25 (50 shares losing 50 cents each). The gross proceeds are what amount to $2467.50.

To have lost $2500 by selling 50 shares at $49.35, you would've had to buy in at $99.35.
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jimmyg
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by jimmyg »

Eagle33 wrote: Sat Dec 04, 2021 4:09 am Whether right or wrong, you are market timing - an anti-Boglehead behavior. Soon will you become a day trader? Instead, just buy & hold until you need to re-balance back to your target AA or actually need the money for some expense.
Thanks for the reply!

Yes, both options I mentioned above involve market timing. I wanted to see if anyone thought there was even a little merit in doing either, or if someone had a better idea. Like you recommended, I'll probably hold these 50 shares and just buy more VWO with new money.

I have no desire at all to become a day trader--this thread was just a little brainstorming / thinking out loud by a newbie investor on how I could lower the basis of these 50 shares.
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jimmyg
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by jimmyg »

iceport wrote: Sat Dec 04, 2021 8:21 am When I read your posts, it almost seems as though realizing the loss for tax purposes is not your objective, but that you simply want to own emerging markets stock with a lower cost basis. Why would you want to do that?
Sorry for being unclear / causing confusion! I only began actively investing in my taxable account last year, so my terms/understanding are still kind of iffy. But you figured out I wanted to do!

I want to buy more VWO shares in my taxable account (using new money) within the next month or two. For the past week, these 50 VWO shares have been fluctuating between an unrealized gain and an unrealized loss. That was distracting me, so I thought "Why not sell these 50 shares to get rid of them, and pool the proceeds with new money to buy a lot more VWO when the price is below $49.35?"

So, yes, my goal is to lower the cost basis for these 50 shares of VWO, and the only way I could see how to attempt that was to market time (even though it would likely not work in my favor).

As far as wanting to own VWO with a lower cost basis, I thought a lower cost basis was better since that means I will have a larger unrealized gain (i.e., I get more value for my original investment) if VWO goes up. What you wrote about a lower cost basis causing a higher tax liability makes sense, but my newbie investor brain is telling me to try to get the maximum gains possible.

I'll most likely just hold these 50 shares and just continue buying-and-holding more VWO. After all, VWO should go back up eventually, so the unrealized loss on these 50 shares should become an unrealized gain again.

Thanks for the feedback!
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jimmyg
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by jimmyg »

Mullins wrote: Sat Dec 04, 2021 10:06 am $2500 wouldn't be the amount of the tax loss.
You have 50 shares. Price goes down to 49.35 and to you that's a 50 cents a share loss. So, if you sell the 50 shares, the total loss for tax purposes is $25 (50 shares losing 50 cents each). The gross proceeds are what amount to $2467.50.

To have lost $2500 by selling 50 shares at $49.35, you would've had to buy in at $99.35.
Thanks for the correction and the explanation!

I guess I used the wrong terms and misunderstood the selling / tax-loss harvesting procedures. What I wanted to do was "undo" my purchase of those 50 shares by selling them at my original purchase price of $49.35, which I thought would result in a $0 realized gain/loss. But I think there's no way to guarantee a price even with a limit order, so the price could have ended up a cent or two higher/lower, resulting in a small capital gain/loss.
Balanthalus
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by Balanthalus »

jimmyg wrote: Sat Dec 04, 2021 11:48 am
iceport wrote: Sat Dec 04, 2021 8:21 am When I read your posts, it almost seems as though realizing the loss for tax purposes is not your objective, but that you simply want to own emerging markets stock with a lower cost basis. Why would you want to do that?
[. . .]

So, yes, my goal is to lower the cost basis for these 50 shares of VWO [. . .]

As far as wanting to own VWO with a lower cost basis, I thought a lower cost basis was better since that means I will have a larger unrealized gain (i.e., I get more value for my original investment) if VWO goes up. [. . .]
You might already have figured this out in reading the prior posts, but just to make things crystal clear: lower bases/unrealized capital gains are often a byproduct of making money or saving on taxes, but are not good in and of themselves. Unrealized capital gains are usually a problem to be solved, not something you would want to deliberately engineer more of by themselves (as opposed to a byproduct of an action with some other purpose).

That's why, for instance, if you are inheriting a $10k asset from a deceased relative, you prefer the step-up in basis the US tax code provides such that your basis is $10k and your unrealized gains are $0. If your basis was, say, only $6k, that just means you have potential tax liability on the $4k in unrealized gains whenever you sell.
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cchrissyy
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by cchrissyy »

if you sell 50 shares and book a loss of 50 cents each, that is $25, which you deduct from your taxable income. without knowing your exact rate, what I do know is the tax savings from having $25 less income is only a few dollars and you don't need to worry about this even a little bit when it comes to making your investing decisions.

if your selling causes a wash sale, what happens is you don't get to deduct the $25 this year but rather, the 50 cents gets added to the purchase price of the new 50 shares you buy, and so someday when you sell them it will look like they have 50 cents less gains on them that needs taxing. it's fine. you haven't lost the benefit you just postponed it. or. if you keep the original shares and they raise in value it's the same thing. it's all fine.
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jimmyg
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by jimmyg »

Balanthalus wrote: Sat Dec 04, 2021 1:14 pm You might already have figured this out in reading the prior posts, but just to make things crystal clear: lower bases/unrealized capital gains are often a byproduct of making money or saving on taxes, but are not good in and of themselves. Unrealized capital gains are usually a problem to be solved, not something you would want to deliberately engineer more of by themselves (as opposed to a byproduct of an action with some other purpose).

That's why, for instance, if you are inheriting a $10k asset from a deceased relative, you prefer the step-up in basis the US tax code provides such that your basis is $10k and your unrealized gains are $0. If your basis was, say, only $6k, that just means you have potential tax liability on the $4k in unrealized gains whenever you sell.
That helps me see things clearer. Thanks!

I don't anticipate needing to sell things in my taxable account to fund my retirement expenses (since I am on track to have a COLA'ed pension that should cover those) except maybe to tax-loss harvest and to pay for an occasional unexpected major expense, so most of my taxable account will go to my heirs and/or donated to charities.
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jimmyg
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by jimmyg »

cchrissyy wrote: Sat Dec 04, 2021 1:35 pm if you sell 50 shares and book a loss of 50 cents each, that is $25, which you deduct from your taxable income. without knowing your exact rate, what I do know is the tax savings from having $25 less income is only a few dollars and you don't need to worry about this even a little bit when it comes to making your investing decisions.

if your selling causes a wash sale, what happens is you don't get to deduct the $25 this year but rather, the 50 cents gets added to the purchase price of the new 50 shares you buy, and so someday when you sell them it will look like they have 50 cents less gains on them that needs taxing. it's fine. you haven't lost the benefit you just postponed it. or. if you keep the original shares and they raise in value it's the same thing. it's all fine.
Thanks for the info!

I read before about how a wash sale isn't necessarily bad since the replacement shares will be adjusted somehow (except when an IRA transaction causes a loss to be permanently disallowed in a taxable account?), but I didn't know exactly how that worked and how complicated it would be to report on my tax return, so I wanted to avoid/minimize a wash sale by purposely selling at/near the original purchase price.

I agree that a wash sale involving this 50-share lot is not worth worrying about, especially in the scenarios I specified. If I wanted to sell a much larger amount of VWO for a loss, then I would just tax-loss harvest and deal with having two emerging market funds/ETFs. But for now, I'll just continue holding these 50 shares and buy more VWO shares soon.
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Nate79
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by Nate79 »

jimmyg wrote: Sat Dec 04, 2021 11:48 am
iceport wrote: Sat Dec 04, 2021 8:21 am When I read your posts, it almost seems as though realizing the loss for tax purposes is not your objective, but that you simply want to own emerging markets stock with a lower cost basis. Why would you want to do that?
Sorry for being unclear / causing confusion! I only began actively investing in my taxable account last year, so my terms/understanding are still kind of iffy. But you figured out I wanted to do!

I want to buy more VWO shares in my taxable account (using new money) within the next month or two. For the past week, these 50 VWO shares have been fluctuating between an unrealized gain and an unrealized loss. That was distracting me, so I thought "Why not sell these 50 shares to get rid of them, and pool the proceeds with new money to buy a lot more VWO when the price is below $49.35?"

So, yes, my goal is to lower the cost basis for these 50 shares of VWO, and the only way I could see how to attempt that was to market time (even though it would likely not work in my favor).

As far as wanting to own VWO with a lower cost basis, I thought a lower cost basis was better since that means I will have a larger unrealized gain (i.e., I get more value for my original investment) if VWO goes up. What you wrote about a lower cost basis causing a higher tax liability makes sense, but my newbie investor brain is telling me to try to get the maximum gains possible.

I'll most likely just hold these 50 shares and just continue buying-and-holding more VWO. After all, VWO should go back up eventually, so the unrealized loss on these 50 shares should become an unrealized gain again.

Thanks for the feedback!
What if the price of VWO is currently at its lowest point ever and will never go below 49.35? Will you wait around in perpetuity for it to drop?
Topic Author
jimmyg
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by jimmyg »

Nate79 wrote: Sat Dec 04, 2021 6:19 pm What if the price of VWO is currently at its lowest point ever and will never go below 49.35? Will you wait around in perpetuity for it to drop?
Thanks for the reply!

I was planning to buy more VWO no matter what, so if I had sold the 50 shares at $49.35 and VWO was not below $49.35 at some point during the next month or two, then I would have combined the sale proceeds with new money to re-buy the 50 shares (and buy additional VWO shares) at the then-current price--and I would have learned my lesson that it is unwise to market-time...

As it is, I will just hold those 50 shares and use new money to buy more VWO. :happy
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cchrissyy
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by cchrissyy »

The answer to not knowing how to report a wash sale on your taxes, or not knowing how to apply an adjusted cost basis to your replacement shares when you eventually sell them - it's the same answer - easy and nothing special to do! Because you are talking about 1 account, the brokerage will simply track this for you and the 1099 form they give you at year end that you import into TurboTax or give it to your CPA or however you do taxes, the point is the 1099 form will have all the info you need.
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jimmyg
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Re: Minimize capital loss to reduce wash sale, or minimize capital gain?

Post by jimmyg »

cchrissyy wrote: Sat Dec 04, 2021 8:41 pm The answer to not knowing how to report a wash sale on your taxes, or not knowing how to apply an adjusted cost basis to your replacement shares when you eventually sell them - it's the same answer - easy and nothing special to do! Because you are talking about 1 account, the brokerage will simply track this for you and the 1099 form they give you at year end that you import into TurboTax or give it to your CPA or however you do taxes, the point is the 1099 form will have all the info you need.
Good to know for future reference! For some reason, I thought I had to remember to somehow correct the replacement shares myself if I sold them in the future, but it makes sense that the brokerage would track everything if all the sold/bought shares were in the same account. However, I am thinking about making all my new purchases at Fidelity now since they offer fractional shares, but I can always transfer potentially-tax-loss-harvestable lots over there in-kind. Thanks again for the info!
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