I don’t understand why tax loss harvesting is that beneficial

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
JustinR
Posts: 1451
Joined: Tue Apr 27, 2010 11:43 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by JustinR »

mikejuss wrote: Mon Apr 26, 2021 5:14 pm
JustinR wrote: Mon Apr 26, 2021 4:53 pmEdit: Sorry, I didn't read the context of your post.

March of last year - You could've harvested several years worth of losses in large downturns like that.

That's really the key...it's way more efficient if you can harvest several years worth at once.

You can deduct $3k a year, so if you have losses of $9k then you're set for this year plus the next two years. At a ~30% tax rate, that's $3,000 after-tax cash for executing a single trade.

Then, you just need another downturn to happen in the next four years to do another one. That's pretty likely to happen.

This way you get the most bang for your buck with minimal work. Not that it's much work at all. In any case, the small amount of work it is to figure everything out and execute the trade is worth a few thousand extra bucks in your pocket.
How do that taxes work on this? Does, say, Vanguard issue a document stating the loss after you sell the stock?
Yes. In your annual tax forms, in the 1099-B (Vanguard issues a consolidated 1099 and it will be a section in there), it'll list your loss amounts (and gains if you have any).

You just plug that into your tax software, and the software will correctly deduct $3,000 for this year, and (at least for my software) figure out the overflow for next year in the "Capital Loss Carryover Worksheet."

If you use the same software next year, it might import this carryover automatically to deduct $3,000 for next year. Or you might have to manually input the correct carryover loss amount. But in the end it's up to you to make sure it's kept track of.
mikejuss
Posts: 2833
Joined: Tue Jun 23, 2020 1:36 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by mikejuss »

JustinR wrote: Mon Apr 26, 2021 5:22 pmYes. In your annual tax forms, in the 1099-B (Vanguard issues a consolidated 1099 and it will be a section in there), it'll list your loss amounts (and gains if you have any).

You just plug that into your tax software, and the software will correctly deduct $3,000 for this year, and (at least for my software) figure out the overflow for next year in the "Capital Loss Carryover Worksheet."

If you use the same software next year, it might import this carryover automatically to deduct $3,000 for next year. Or you might have to manually input the correct carryover loss amount. But in the end it's up to you to make sure it's kept track of.
I see--so it's up to the seller to keep track of multiple years of losses.

And this deduction in income tax is totally separate from the deduction in capital-gains tax? Keeping track of all of this stuff seems complicated (and subject to error).
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
User avatar
neurosphere
Posts: 5205
Joined: Sun Jan 17, 2010 12:55 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by neurosphere »

mikejuss wrote: Mon Apr 26, 2021 5:28 pm I see--so it's up to the seller to keep track of multiple years of losses.

And this deduction in income tax is totally separate from the deduction in capital-gains tax? Keeping track of all of this stuff seems complicated (and subject to error).
If you enter it in tax software in year 1, the software will keep track, and also print out the carryforward amount for reference for next year's software/preparer if different.

But YES. You have to be a backup and keep track in some way. One client of mine had $400,000 in losses almost GONE because one new accountant neglected to check the previous unused losses. I always review the past 4 years of taxes for this very reason. They had three days to submit an amended return to preserve all those losses. It was almost a $100,000 error.

But people have to keep track of all sorts of things: IRA contributions, charitable contributions, estimated tax payments, mileage/expenses/deductions from self employment income, etc. Once you learn about carryforward losses, you won't forget to check each year. That is, when you do your taxes this year you'll see if there are any unused losses. If so, just make sure to keep this info in your next-years tax pile (the same pile you would use to keep that tax year's 1099s, W2, mortgage interest statements, whatever).
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
JustinR
Posts: 1451
Joined: Tue Apr 27, 2010 11:43 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by JustinR »

mikejuss wrote: Mon Apr 26, 2021 5:28 pm
JustinR wrote: Mon Apr 26, 2021 5:22 pmYes. In your annual tax forms, in the 1099-B (Vanguard issues a consolidated 1099 and it will be a section in there), it'll list your loss amounts (and gains if you have any).

You just plug that into your tax software, and the software will correctly deduct $3,000 for this year, and (at least for my software) figure out the overflow for next year in the "Capital Loss Carryover Worksheet."

If you use the same software next year, it might import this carryover automatically to deduct $3,000 for next year. Or you might have to manually input the correct carryover loss amount. But in the end it's up to you to make sure it's kept track of.
I see--so it's up to the seller to keep track of multiple years of losses.

And this deduction in income tax is totally separate from the deduction in capital-gains tax? Keeping track of all of this stuff seems complicated (and subject to error).
It's not that hard to keep track of. After doing your taxes every year, look at your "Capital Loss Carryover Worksheet" lines 8 and 13. Write these numbers down in a text file:

Short term capital loss carryover: 900
Long term capital loss carryover: 5,240

Next year, input these into your software when it asks. If you need to check, it goes on Schedule D lines 6 and 14.


Your new numbers for the year after that will be:

Short term capital loss carryover: 0
Long term capital loss carryover: 3,140

Repeat.
mikejuss
Posts: 2833
Joined: Tue Jun 23, 2020 1:36 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by mikejuss »

neurosphere wrote: Mon Apr 26, 2021 5:35 pmIf you enter it in tax software in year 1, the software will keep track, and also print out the carryforward amount for reference for next year's software/preparer if different.

But YES. You have to be a backup and keep track in some way. One client of mine had $400,000 in losses almost GONE because one new accountant neglected to check the previous unused losses. I always review the past 4 years of taxes for this very reason. They had three days to submit an amended return to preserve all those losses. It was almost a $100,000 error.

But people have to keep track of all sorts of things: IRA contributions, charitable contributions, estimated tax payments, mileage/expenses/deductions from self employment income, etc. Once you learn about carryforward losses, you won't forget to check each year. That is, when you do your taxes this year you'll see if there are any unused losses. If so, just make sure to keep this info in your next-years tax pile (the same pile you would use to keep that tax year's 1099s, W2, mortgage interest statements, whatever).
Thank you. Please let me know if this tax-loss harvest scenario is correct:

1.) One buys $100,000 of VTSAX
2.) Three years later, it's appreciated to $125,000
3.) There's a market dip that cuts the total amount in half, to $62,000
4.) One sells the $62,000 of VTSAX and buys $62,000 of VFIAX
5.) On one's tax return, one books a $63,000 loss
6.) One can either deduct $3,000 of that amount each year from one's tax return for 21 years OR one can wait and, should the VFIAX appreciate by $63,000 over time, pay no capital gains on that amount if one decides to sell the VFAIX

This sounds great, but I can hear the ghost of Jack Bogle whispering in my ear, "Don't fiddle with your portfolio."
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
Gus Chiggins
Posts: 81
Joined: Thu Apr 16, 2015 8:35 am

Re: I don’t understand why tax loss harvesting is that beneficial

Post by Gus Chiggins »

mikejuss wrote: Mon Apr 26, 2021 6:39 pm
neurosphere wrote: Mon Apr 26, 2021 5:35 pmIf you enter it in tax software in year 1, the software will keep track, and also print out the carryforward amount for reference for next year's software/preparer if different.

But YES. You have to be a backup and keep track in some way. One client of mine had $400,000 in losses almost GONE because one new accountant neglected to check the previous unused losses. I always review the past 4 years of taxes for this very reason. They had three days to submit an amended return to preserve all those losses. It was almost a $100,000 error.

But people have to keep track of all sorts of things: IRA contributions, charitable contributions, estimated tax payments, mileage/expenses/deductions from self employment income, etc. Once you learn about carryforward losses, you won't forget to check each year. That is, when you do your taxes this year you'll see if there are any unused losses. If so, just make sure to keep this info in your next-years tax pile (the same pile you would use to keep that tax year's 1099s, W2, mortgage interest statements, whatever).
Thank you. Please let me know if this tax-loss harvest scenario is correct:

1.) One buys $100,000 of VTSAX
2.) Three years later, it's appreciated to $125,000
3.) There's a market dip that cuts the total amount in half, to $62,000
4.) One sells the $62,000 of VTSAX and buys $62,000 of VFIAX
5.) On one's tax return, one books a $63,000 loss
6.) One can either deduct $3,000 of that amount each year from one's tax return for 21 years OR one can wait and, should the VFIAX appreciate by $63,000 over time, pay no capital gains on that amount if one decides to sell the VFAIX

This sounds great, but I can hear the ghost of Jack Bogle whispering in my ear, "Don't fiddle with your portfolio."
You book a $38,000 loss, as your cost basis in $100,000, not $125,000.

You’re also misunderstanding how to loss is applied and carried forward.

As far as fiddling with your portfolio, you really aren’t doing anything to impact your asset allocation if done properly. It’s very little effort (potentially a single mutual fund trade) to potentially realize very meaningful tax savings. As with anything, everyone’s individual circumstances will determine how meaningful.
Last edited by Gus Chiggins on Mon Apr 26, 2021 7:07 pm, edited 1 time in total.
User avatar
neurosphere
Posts: 5205
Joined: Sun Jan 17, 2010 12:55 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by neurosphere »

mikejuss wrote: Mon Apr 26, 2021 6:39 pm 6.) One can either deduct $3,000 of that amount each year from one's tax return for 21 years OR one can wait and, should the VFIAX appreciate by $63,000 over time, pay no capital gains on that amount if one decides to sell the VFAIX
No. One HAS to book the losses to offset gains and/or ordinary income. There is no "choose". If there are no other capital gains distributions or sales which have resulted in gains in the taxable year, one must offset (up to) $3000 in ordinary income and carry forward the remainder.

Also, the carryforward losses can be used (must be used) to offset gains from ANY investment. For example, if you sell a home which has appreciated more than $250,000/$500,000, those gains would be offset by prior carryforward losses. If you have gains from another ETF/stock/mutual fund or any other investment, those gains would be offset by the losses too.

Gus Chuggins has already corrected the amount of loss you can book, from your example, but the principles are the same.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
mikejuss
Posts: 2833
Joined: Tue Jun 23, 2020 1:36 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by mikejuss »

neurosphere wrote: Mon Apr 26, 2021 6:54 pm
mikejuss wrote: Mon Apr 26, 2021 6:39 pm 6.) One can either deduct $3,000 of that amount each year from one's tax return for 21 years OR one can wait and, should the VFIAX appreciate by $63,000 over time, pay no capital gains on that amount if one decides to sell the VFAIX
No. One HAS to book the losses to offset gains and/or ordinary income. There is no "choose". If there are no other capital gains distributions or sales which have resulted in gains in the taxable year, one must offset (up to) $3000 in ordinary income and carry forward the remainder.

Also, the carryforward losses can be used (must be used) to offset gains from ANY investment. For example, if you sell a home which has appreciated more than $250,000/$500,000, those gains would be offset by prior carryforward losses. If you have gains from another ETF/stock/mutual fund or any other investment, those gains would be offset by the losses too.

Gus Chuggins has already corrected the amount of loss you can book, from your example, but the principles are the same.
Wow--I think you've convinced me. I was pretty skeptical of tax-loss harvesting for a while, as it seemed over my head.

One last question: are there any time constraints on buying and selling the partner stock--ie, if VTSAX goes down by 50%, can one immediately exchange it for VFAIX? And if VFAIX subsequently goes down by 25%, can it be exchanged back to VTSAX?
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
User avatar
FIREchief
Posts: 6916
Joined: Fri Aug 19, 2016 6:40 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by FIREchief »

mikejuss wrote: Mon Apr 26, 2021 5:22 pm
neurosphere wrote: Mon Apr 26, 2021 5:19 pm
mikejuss wrote: Mon Apr 26, 2021 5:14 pm How do that taxes work on this? Does, say, Vanguard issue a document stating the loss after you sell the stock?
Assuming shares bought after 2012, Vanguard will issue a 1099 at the end of the year showing the results of every taxable sale, gain or loss. They will also separate all the gains and losses by category, such as short-term losses, long term losses, short term gains, etc.

In the meantime, the online account will show both unrealized losses/gains (current positions) as well as realized gains/losses from completed sales.
But how does one clock, say, a $12,000 loss by recording a $3,000 loss for 4 straight years?
Have you ever read the instructions for IRS form 1040 Schedule D?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: I don’t understand why tax loss harvesting is that beneficial

Post by grabiner »

mikejuss wrote: Mon Apr 26, 2021 12:54 pm It's not really clear to me how your cost basis and your capital gains interact in this situation, and whether doing nothing after a loss, and waiting for the market to bounce back, isn't a better course of action.

I'm trying to wrap my head around this, so correct me if I'm wrong, but let's suppose someone has purchased $150,000 of VTSAX, and it has returned an additional $50,000. If the market tanks by 50%, the return is wiped out, as is $50,000 of the cost basis. The investor sells the remaining $100,000 of VTSAX and purchases VFINX. Are we saying that this investor would pay no capital-gains taxes on the first $50,000 of return on the VFINX investment? If so, what if the investor had done nothing with the original VTSAX holding and simply waited for it to bounce back to the level of the cost basis? I don't see the benefit of tax-loss harvesting in this case.
What you are missing here is that the investor would take $3000 off his taxes every year. Suppose that the investor is in a 24% bracket, and sells the replacement fund for $150K five years later.

Year 1: $3000 capital loss for $720 tax reduction
Years 2-5: ditto
Year 6: $35,000 remaining capital loss offsets capital gain, $15K remaining gain leads to $2250 of tax.

So, over the first years, the investor saved $3600, then paid $2250 in the sixth year. The net benefit is $1350 plus the investment returns on the $3600. The investor who didn't harvest would break even on taxes.

And other benefits are possible. Since the shares I purchase after my tax loss harvests have low basis, many of them were the shares I donated to charity, so I never pay an increased tax as a result of the reduced basis.
Wiki David Grabiner
lazynovice
Posts: 3370
Joined: Mon Apr 16, 2012 10:48 pm
Location: Denver area. Former Texan.

Re: I don’t understand why tax loss harvesting is that beneficial

Post by lazynovice »

sureshoe wrote: Mon Apr 26, 2021 3:39 pm
neurosphere wrote: Mon Apr 26, 2021 12:46 pm
sureshoe wrote: Mon Apr 26, 2021 12:35 pm Harvesting a loss smaller than $1k feels like more trouble than it's worth when you start thinking about the cost of not being invested and transaction fees and wash sales.
When I TLH I have a partner such that I'm always invested. I have no transaction fees, and forced wash sales are rare or occur only because I otherwise have some compelling reason to create a wash sale.

But I agree, it's up to everyone to determine how big a loss is worth it. For me it's about $500, depending on my mood that day. :)
Curious, how often is this actually happening? The vast majority of my regular investing is happening in tax shelters so there is no benefit. I buy a lot every month or so depending on what's going on in my personal finance, usually in the $10000 lot size. If I buy and the market immediately drops 1-2% in the next day or two, I might be tempted, flip this around, but in my taxable accounts I'm almost exclusively VT and VTI.

Anyway... just curious for a little more detail, because I'm looking for real examples. Maybe in the last few years, I've just been spoiled with up markets.
I am assuming you are not forgetting March 2020 when you could have tax loss harvested FIVE years of VT purchases or March 2018 when you could have done four months of VTI, or December 2018 when you could have done two years worth of VTI and you mean how often aside from a big drop. While the markets have been good for years, there have been a lot of opportunities.

Here is an example from this year:

I invested $81,000 of a bonus on February 25 in VTI ($206/share). TLH on March 4 at $196/share. $3,900 of losses. I bought early in the day on 2/25. It dropped to 200 by close (of course!) and bounced around for a few days even getting to 204 on 3/1.

If you substitute your 10,000 for my 81,000, a comparable loss would have been $481.

Markets do not always go straight up or straight down. You have to set up alerts or check periodically.
Whakamole
Posts: 1765
Joined: Wed Jan 13, 2016 8:59 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by Whakamole »

This is mostly because I hold international in taxable (except for the blip at the end of December 2018), but between the panic over Brexit and the panic last March over COVID, I've gone from writing a check to the IRS to getting a nice refund, and that will continue for years to come. At higher tax bracket, it is very welcome.

I have a spreadsheet that keeps track of my taxable lots, the purchase price, and whether there are any TLH opportunities. For ETFs, this is trivial. For mutual funds, I calculate the estimated NAV based on the % change of the applicable ETF; so if VOO is down 2%, I estimate VFIAX will be down 2% as well, and can make TLH decisions based on that, with caveats like needing to wait until EOD.

I only check my spreadsheet if I hear about a market crash.

Do be mindful of your TLH partner(s), and have backups for your backups. If possible have them lined up ahead of time.
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

It's good to understand TLH and to be ready to move.

Post by hudson »

Whakamole wrote: Tue Apr 27, 2021 1:58 am Do be mindful of your TLH partner(s), and have backups for your backups. If possible have them lined up ahead of time.
Agree!
I didn't have a plan last March, so I missed the boat; now I'm ready.

Bottom Line:
It's good to understand TLH and to be ready to move.
It's helpful to have gone through a few TLH/tax return cycles. It took me years to figure it all out.
Thanks Coach Livesoft!

I like "backups for your backups!" That also applies to your data. :)
User avatar
JonnyDVM
Posts: 2999
Joined: Wed Feb 12, 2014 5:51 pm
Location: Atlanta, GA

Re: I don’t understand why tax loss harvesting is that beneficial

Post by JonnyDVM »

Tax loss harvesting is awesome if you have a sizeable taxable account and don’t feel an obligation to hold the perfect three fund portfolio. I flipped all over the place in March 20 and saved a boatload. I do agree that at one point I ran out of funds and had to start asking questions about what backup backup to use.
I’d trade it all for a little more | -C Montgomery Burns
User avatar
SmileyFace
Posts: 9186
Joined: Wed Feb 19, 2014 9:11 am

Re: I don’t understand why tax loss harvesting is that beneficial

Post by SmileyFace »

JonnyDVM wrote: Tue Apr 27, 2021 6:30 am Tax loss harvesting is awesome if you have a sizeable taxable account and don’t feel an obligation to hold the perfect three fund portfolio. I flipped all over the place in March 20 and saved a boatload. I do agree that at one point I ran out of funds and had to start asking questions about what backup backup to use.
A number of bogleheads TLH with a 3 fund portfolio. There are a number of discussions about using various Total-Market ETFs (VTI, ITOT, SCHB, etc) as TLH pairs (entire threads discuss whether or not these are substantially identical so we don't need to repeat that debate here - I just wanted to point out a number of folks are doing it).
User avatar
JonnyDVM
Posts: 2999
Joined: Wed Feb 12, 2014 5:51 pm
Location: Atlanta, GA

Re: I don’t understand why tax loss harvesting is that beneficial

Post by JonnyDVM »

SmileyFace wrote: Tue Apr 27, 2021 6:51 am
JonnyDVM wrote: Tue Apr 27, 2021 6:30 am Tax loss harvesting is awesome if you have a sizeable taxable account and don’t feel an obligation to hold the perfect three fund portfolio. I flipped all over the place in March 20 and saved a boatload. I do agree that at one point I ran out of funds and had to start asking questions about what backup backup to use.
A number of bogleheads TLH with a 3 fund portfolio. There are a number of discussions about using various Total-Market ETFs (VTI, ITOT, SCHB, etc) as TLH pairs (entire threads discuss whether or not these are substantially identical so we don't need to repeat that debate here - I just wanted to point out a number of folks are doing it).
Sure. It absolutely can and should be done. By “perfect” I meant those posters with a bizarre adherence to specifically Vanguard US market fund and Vanguard total international fund. There were posts last spring lamenting that the fund used for the harvest had grown too much in 30 days and what should the poster do to get back into VTSAX? 😂
I’d trade it all for a little more | -C Montgomery Burns
User avatar
SmileyFace
Posts: 9186
Joined: Wed Feb 19, 2014 9:11 am

Re: I don’t understand why tax loss harvesting is that beneficial

Post by SmileyFace »

JonnyDVM wrote: Tue Apr 27, 2021 7:31 am
SmileyFace wrote: Tue Apr 27, 2021 6:51 am
JonnyDVM wrote: Tue Apr 27, 2021 6:30 am Tax loss harvesting is awesome if you have a sizeable taxable account and don’t feel an obligation to hold the perfect three fund portfolio. I flipped all over the place in March 20 and saved a boatload. I do agree that at one point I ran out of funds and had to start asking questions about what backup backup to use.
A number of bogleheads TLH with a 3 fund portfolio. There are a number of discussions about using various Total-Market ETFs (VTI, ITOT, SCHB, etc) as TLH pairs (entire threads discuss whether or not these are substantially identical so we don't need to repeat that debate here - I just wanted to point out a number of folks are doing it).
Sure. It absolutely can and should be done. By “perfect” I meant those posters with a bizarre adherence to specifically Vanguard US market fund and Vanguard total international fund. There were posts last spring lamenting that the fund used for the harvest had grown too much in 30 days and what should the poster do to get back into VTSAX? 😂
Good point. I think I remember that one. VTSAX or bust.
mikejuss
Posts: 2833
Joined: Tue Jun 23, 2020 1:36 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by mikejuss »

SmileyFace wrote: Tue Apr 27, 2021 6:51 am
JonnyDVM wrote: Tue Apr 27, 2021 6:30 am Tax loss harvesting is awesome if you have a sizeable taxable account and don’t feel an obligation to hold the perfect three fund portfolio. I flipped all over the place in March 20 and saved a boatload. I do agree that at one point I ran out of funds and had to start asking questions about what backup backup to use.
A number of bogleheads TLH with a 3 fund portfolio. There are a number of discussions about using various Total-Market ETFs (VTI, ITOT, SCHB, etc) as TLH pairs (entire threads discuss whether or not these are substantially identical so we don't need to repeat that debate here - I just wanted to point out a number of folks are doing it).
There's definitely a bias toward VTSAX here. (I'm a guilty party.) With regards to choosing partner funds, am I correct in believing that if I hold VTSAX in my brokerage account and tax-loss harvest into VFIAX, but also continue to hold VTSAX in my Roth IRA account, I cannot tax-loss harvest in my brokerage account back into VTSAX from VFIAX?
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: I don’t understand why tax loss harvesting is that beneficial

Post by nolesrule »

mikejuss wrote: Tue Apr 27, 2021 10:47 am
SmileyFace wrote: Tue Apr 27, 2021 6:51 am
JonnyDVM wrote: Tue Apr 27, 2021 6:30 am Tax loss harvesting is awesome if you have a sizeable taxable account and don’t feel an obligation to hold the perfect three fund portfolio. I flipped all over the place in March 20 and saved a boatload. I do agree that at one point I ran out of funds and had to start asking questions about what backup backup to use.
A number of bogleheads TLH with a 3 fund portfolio. There are a number of discussions about using various Total-Market ETFs (VTI, ITOT, SCHB, etc) as TLH pairs (entire threads discuss whether or not these are substantially identical so we don't need to repeat that debate here - I just wanted to point out a number of folks are doing it).
There's definitely a bias toward VTSAX here. (I'm a guilty party.) With regards to choosing partner funds, am I correct in believing that if I hold VTSAX in my brokerage account and tax-loss harvest into VFIAX, but also continue to hold VTSAX in my Roth IRA account, I cannot tax-loss harvest in my brokerage account back into VTSAX from VFIAX?
The limitation is based on when you made purchases. Read up on Wash sales here. https://www.bogleheads.org/wiki/Wash_sale
curious george
Posts: 128
Joined: Sat Jul 27, 2013 11:24 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by curious george »

So, if you have a VG mutual funds or ETFs - aren’t there limited or no cap gains if not sold?
If so, TLH just yields the 3,000 net deduction on income for taxes - which is still great depending upon your tax brackets.
While important, I have been losing sleep worrying about missed TLH opportunities- that now seems a bit excessive.
If you have a large taxable account, then one could TLH and be set for 10 years.

Am I missing something else ?
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: I don’t understand why tax loss harvesting is that beneficial

Post by grabiner »

curious george wrote: Thu Nov 24, 2022 12:34 pm So, if you have a VG mutual funds or ETFs - aren’t there limited or no cap gains if not sold?
If so, TLH just yields the 3,000 net deduction on income for taxes - which is still great depending upon your tax brackets.
While important, I have been losing sleep worrying about missed TLH opportunities- that now seems a bit excessive.
If you have a large taxable account, then one could TLH and be set for 10 years.

Am I missing something else ?
What you are missing is that you may need to sell, and have losses to offset. I harvested large losses in 2008-2009. Then, in 2013, I needed to sell stock to make a home down payment, and the market was at a peak, so all my stock had gains. The 2008-2009 losses offset the gains.
Wiki David Grabiner
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by Marseille07 »

grabiner wrote: Thu Nov 24, 2022 12:40 pm What you are missing is that you may need to sell, and have losses to offset. I harvested large losses in 2008-2009. Then, in 2013, I needed to sell stock to make a home down payment, and the market was at a peak, so all my stock had gains. The 2008-2009 losses offset the gains.
If you didn't book losses in 2008~2009, then in 2013 your gains would have been a lot smaller, in fact should be the same amount hadn't you harvested the losses, minus the ordinary income reduction of 3K/year between 2009~2013.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: I don’t understand why tax loss harvesting is that beneficial

Post by grabiner »

Marseille07 wrote: Thu Nov 24, 2022 12:57 pm
grabiner wrote: Thu Nov 24, 2022 12:40 pm What you are missing is that you may need to sell, and have losses to offset. I harvested large losses in 2008-2009. Then, in 2013, I needed to sell stock to make a home down payment, and the market was at a peak, so all my stock had gains. The 2008-2009 losses offset the gains.
If you didn't book losses in 2008~2009, then in 2013 your gains would have been a lot smaller, in fact should be the same amount hadn't you harvested the losses, minus the ordinary income reduction of 3K/year between 2009~2013.
The reason the gains would not cancel out is that I bought more stock than just the replacements. If I hadn't harvested losses in 2008-2009, I would still have sold some shares bought in 2012, for the same gain that I actually had on those shares. (The total gain would still have been less, because I would have sold shares bought in 2007 rather than shares bought in 2010.)
Wiki David Grabiner
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by Marseille07 »

grabiner wrote: Thu Nov 24, 2022 1:15 pm The reason the gains would not cancel out is that I bought more stock than just the replacements. If I hadn't harvested losses in 2008-2009, I would still have sold some shares bought in 2012, for the same gain that I actually had on those shares. (The total gain would still have been less, because I would have sold shares bought in 2007 rather than shares bought in 2010.)
You're right. I think TLH is beneficial when you have a spending event where you can offset the gains. 10~20K or so feels right to me.

It's kind of like liability matching in a way.
User avatar
Lee_WSP
Posts: 10403
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: I don’t understand why tax loss harvesting is that beneficial

Post by Lee_WSP »

Marseille07 wrote: Thu Nov 24, 2022 1:42 pm
grabiner wrote: Thu Nov 24, 2022 1:15 pm The reason the gains would not cancel out is that I bought more stock than just the replacements. If I hadn't harvested losses in 2008-2009, I would still have sold some shares bought in 2012, for the same gain that I actually had on those shares. (The total gain would still have been less, because I would have sold shares bought in 2007 rather than shares bought in 2010.)
You're right. I think TLH is beneficial when you have a spending event where you can offset the gains. 10~20K or so feels right to me.

It's kind of like liability matching in a way.
It allowed him to continue deferring his cap gains and reduce the basis of his holdings. If he sells them all in his lifetime, it's a net zero. If he achieves a step up, he wins.
User avatar
Lee_WSP
Posts: 10403
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: I don’t understand why tax loss harvesting is that beneficial

Post by Lee_WSP »

curious george wrote: Thu Nov 24, 2022 12:34 pm If so, TLH just yields the 3,000 net deduction on income for taxes - which is still great depending upon your tax brackets.
It's not a deduction, it's a reduction of top line income. It may or may not ultimately make a difference on taxes owed, not an expert on filling out the 1040.
User avatar
Toth
Posts: 8
Joined: Sun Jan 09, 2022 10:53 am

Re: I don’t understand why tax loss harvesting is that beneficial

Post by Toth »

I'm poor relative to most the board and live in a 0% LTCG state so I can TGH at 0% and TLH my losses. Also being poor means every dollar means more to me.
BF3000
Posts: 164
Joined: Tue Jun 08, 2021 7:16 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by BF3000 »

The benefit is meager if you aren’t going to offset a capital gain within the next few years, but still positive. Since it takes 30 seconds to do, many people find it is worth the effort even under the least advantageous circumstances. You would have the same asset exposure but a $3,000 deduction against ordinary income to boot.

If you have capital gains, the benefit is more substantial.

If you don’t have any conceivable capital gains in your future, and find a $3,000 deduction too small to mess with because identifying a TLH partner and using a brokerage app or website is too complicated, then the benefit isn’t worth the effort.

If you have an obsession with vanguards funds versus, say, blackrock, state street, and Schwab, it sometimes becomes difficult to find a partner.
dcabler
Posts: 4544
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: I don’t understand why tax loss harvesting is that beneficial

Post by dcabler »

BF3000 wrote: Thu Nov 24, 2022 8:44 pm The benefit is meager if you aren’t going to offset a capital gain within the next few years, but still positive. Since it takes 30 seconds to do, many people find it is worth the effort even under the least advantageous circumstances. You would have the same asset exposure but a $3,000 deduction against ordinary income to boot.

If you have capital gains, the benefit is more substantial.

If you don’t have any conceivable capital gains in your future, and find a $3,000 deduction too small to mess with because identifying a TLH partner and using a brokerage app or website is too complicated, then the benefit isn’t worth the effort.

If you have an obsession with vanguards funds versus, say, blackrock, state street, and Schwab, it sometimes becomes difficult to find a partner.
Yeah, the $3K offset won't exactly move everybody's lifestyle a whole lot, but if it's easy then why not. I know that I will have capital gains via withdrawals from my taxable account as I begin retirement. I assume most people who have a taxable account would be in a similar situation.

cheers.
UpperNwGuy
Posts: 9479
Joined: Sun Oct 08, 2017 7:16 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by UpperNwGuy »

Lee_WSP wrote: Thu Nov 24, 2022 2:22 pm
curious george wrote: Thu Nov 24, 2022 12:34 pm If so, TLH just yields the 3,000 net deduction on income for taxes - which is still great depending upon your tax brackets.
It's not a deduction, it's a reduction of top line income. It may or may not ultimately make a difference on taxes owed, not an expert on filling out the 1040.
Yep, a lot of people on this board don’t understand this.
User avatar
GMCZ71
Posts: 559
Joined: Sat Oct 13, 2018 8:05 am
Location: McMinnville, Or

Re: I don’t understand why tax loss harvesting is that beneficial

Post by GMCZ71 »

I have been explaining TLH to coworkers and they are not sure about it either. They are into Robinhood and coins with losses but are hoping for the gamestop/BTC winner.
I tell them about the $3000 income deduction plus open a Trad Ira and put up to $6000. Now $9000 of reduction and may qualify for the Savers credit of up to $1000 tax credit.
John | * Friends and family and money | * What you recommend will have periods of underperformance. You will be blamed. | * You avoid the suspicion of "self-serving." by Taylor Larimore
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: I don’t understand why tax loss harvesting is that beneficial

Post by grabiner »

Lee_WSP wrote: Thu Nov 24, 2022 2:20 pm
Marseille07 wrote: Thu Nov 24, 2022 1:42 pm
grabiner wrote: Thu Nov 24, 2022 1:15 pm The reason the gains would not cancel out is that I bought more stock than just the replacements. If I hadn't harvested losses in 2008-2009, I would still have sold some shares bought in 2012, for the same gain that I actually had on those shares. (The total gain would still have been less, because I would have sold shares bought in 2007 rather than shares bought in 2010.)
You're right. I think TLH is beneficial when you have a spending event where you can offset the gains. 10~20K or so feels right to me.

It's kind of like liability matching in a way.
It allowed him to continue deferring his cap gains and reduce the basis of his holdings. If he sells them all in his lifetime, it's a net zero. If he achieves a step up, he wins.
And I frequently donate my TLH replacement shares to charity, so that the reduced basis doesn't increase my total capital gain.
Wiki David Grabiner
User avatar
Lee_WSP
Posts: 10403
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: I don’t understand why tax loss harvesting is that beneficial

Post by Lee_WSP »

grabiner wrote: Fri Nov 25, 2022 11:07 am
Lee_WSP wrote: Thu Nov 24, 2022 2:20 pm
Marseille07 wrote: Thu Nov 24, 2022 1:42 pm
grabiner wrote: Thu Nov 24, 2022 1:15 pm The reason the gains would not cancel out is that I bought more stock than just the replacements. If I hadn't harvested losses in 2008-2009, I would still have sold some shares bought in 2012, for the same gain that I actually had on those shares. (The total gain would still have been less, because I would have sold shares bought in 2007 rather than shares bought in 2010.)
You're right. I think TLH is beneficial when you have a spending event where you can offset the gains. 10~20K or so feels right to me.

It's kind of like liability matching in a way.
It allowed him to continue deferring his cap gains and reduce the basis of his holdings. If he sells them all in his lifetime, it's a net zero. If he achieves a step up, he wins.
And I frequently donate my TLH replacement shares to charity, so that the reduced basis doesn't increase my total capital gain.
Even more tax efficient :sharebeer :beer
Piehole
Posts: 42
Joined: Mon Jun 17, 2019 8:30 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by Piehole »

My experiences with TLH have been mixed. But, I’m sure the brokerage houses like it, anything to get us to churn our accounts. What did Bogle say? “ If there’s no action on Wall Street, there’s no money on Wall Street”.
brawlrats
Posts: 542
Joined: Thu Dec 02, 2021 12:06 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by brawlrats »

grabiner wrote: Fri Nov 25, 2022 11:07 am
And I frequently donate my TLH replacement shares to charity, so that the reduced basis doesn't increase my total capital gain.
This is what I do. All the benefit of the losses and no tax on the gains.
curious george
Posts: 128
Joined: Sat Jul 27, 2013 11:24 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by curious george »

What is interesting is that I have seen some strongly recommend it while I have seen others say it is of benefit but pretty limited. I do wonder how much it does add to returns ? I guess it’s hard to quantify as it is a nuanced answer depending upon one’s specific circumstances.
I also wonder if it requires turning off reinvestment of automatic dividends- is it still worth it or do most turn that back on after doing some TLH?
In general terms , what is the magnitude of TLH benefits ?
Where in the order of importance does this one fit?

Thanks for the wonderful discussion and education
User avatar
slowandsteadywins
Posts: 301
Joined: Tue Dec 20, 2016 2:13 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by slowandsteadywins »

curious george wrote: Sat Nov 26, 2022 8:24 am What is interesting is that I have seen some strongly recommend it while I have seen others say it is of benefit but pretty limited. I do wonder how much it does add to returns ? I guess it’s hard to quantify as it is a nuanced answer depending upon one’s specific circumstances.
I also wonder if it requires turning off reinvestment of automatic dividends- is it still worth it or do most turn that back on after doing some TLH?
In general terms , what is the magnitude of TLH benefits ?
Where in the order of importance does this one fit?

Thanks for the wonderful discussion and education
https://research.wealthfront.com/whitep ... arvesting/

Wealthfront did a good job, in my opinion, explaining the TLH benefits and specific scenario examples.
"Nothing in this world can take the place of persistence; Persistence and determination alone are omnipotent." | -Calvin Coolidge
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by international001 »

slowandsteadywins wrote: Sat Nov 26, 2022 9:00 am
https://research.wealthfront.com/whitep ... arvesting/

Wealthfront did a good job, in my opinion, explaining the TLH benefits and specific scenario examples.
And as they mention is a benefit that maxes $3000 year * your_tax_bracket (and the offset is some capital gains increase to pay in the remote future)
So the benefits are limited. In my case, I use it to offset other capital gains (some stocks I want to sell), what it's also good.
chassis
Posts: 2184
Joined: Tue Mar 24, 2020 4:28 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by chassis »

I-Know-Nothing wrote: Sun Apr 25, 2021 10:49 am I still have a lot to learn, but there must be something I’m missing in my understanding of tax loss harvesting. It seems like it would have a small benefit, but not significant, because you are limited to $3,000 per year. The way I understand it, if a person had $200k invested in VTSAX, and the market had a horrible crash where VTSAX lost 45% of its value, the person could sell could sell the VTSAX at a loss of $90k and invest the remaining $110k in VTIAX. Now that person’s new cost basis is $110k. They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains. And that will be helpful, because they will probably have significant capital gains in this case, as their cost basis is now much lower and the market just crashed. This sounds good, but is $3k a year enough to really alter the picture that much for most investors?
Tax loss harvesting and Roth conversions are not that beneficial. They are chases after the wind. You are thinking clearly on this.
coachd50
Posts: 1778
Joined: Sun Oct 22, 2017 10:12 am

Re: I don’t understand why tax loss harvesting is that beneficial

Post by coachd50 »

chassis wrote: Sat Nov 26, 2022 8:33 pm
I-Know-Nothing wrote: Sun Apr 25, 2021 10:49 am I still have a lot to learn, but there must be something I’m missing in my understanding of tax loss harvesting. It seems like it would have a small benefit, but not significant, because you are limited to $3,000 per year. The way I understand it, if a person had $200k invested in VTSAX, and the market had a horrible crash where VTSAX lost 45% of its value, the person could sell could sell the VTSAX at a loss of $90k and invest the remaining $110k in VTIAX. Now that person’s new cost basis is $110k. They would harvest the $90k loss and could use $3k of it per year for 30 years, in order to offset capital gains. And that will be helpful, because they will probably have significant capital gains in this case, as their cost basis is now much lower and the market just crashed. This sounds good, but is $3k a year enough to really alter the picture that much for most investors?
Tax loss harvesting and Roth conversions are not that beneficial. They are chases after the wind. You are thinking clearly on this.
I don't think your statement is accurate at all as evidenced by many of the posts here.
Personally, as a public school teacher I tend to hover right around the 22% Bracket once you factor in Pre tax contributions and Standard Deductions. So thats potentially 10% for me. My pension will not be as great as my current income, and I will be firmly in the 12% bracket.
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Tax Loss Harvest Example

Post by hudson »

Let's say that I have a short term capital loss of $20,000 in SCHP...Schwab's 7.5 year effective duration and intermediate TIPS ETF.

I sell $170K of SCHP on Monday and get a $20,000 short term capital loss.
As soon as possible, I buy IShares TIP...at TIPS bond ETF (with a 7.26 years effective duration....a little higher expense ratio)...likely for $170K.

Therefore, the same horse rider, gets a different but almost identical horse and also gets almost 7 years of $3000 capital losses.

Summary:
Sell SCHP...get $20K capital loss.
Buy TIP...same duration...almost the same holdings.
Get $20K short term capital loss
5 minutes of work
What's not to like? (I know. TIP's Expense ratio is higher than SCHP's) (If this was real, I'd hold off until the monthly dividend was in my pocket.)
Last edited by hudson on Sun Nov 27, 2022 11:21 am, edited 1 time in total.
TropikThunder
Posts: 3918
Joined: Sun Apr 03, 2016 5:41 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by TropikThunder »

Piehole wrote: Sat Nov 26, 2022 7:42 am I’m sure the brokerage houses like it, anything to get us to churn our accounts.
How does Vanguard make money if I exchange VTSAX for VFINX? There’s no transaction fee. I don’t see how the brokerage houses would care if I TLH’d or not.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Tax Loss Harvest Example

Post by international001 »

hudson wrote: Sun Nov 27, 2022 8:25 am Let's say that I have a short term capital loss of $20,000 in SCHP...Schwab's 7.5 year effective duration and intermediate TIPS ETF.

I sell $170K of SCHP on Monday and get a $20,000 short term capital loss.
As soon as possible, I buy IShares TIP...at TIPS bond ETF (with a 7.26 years effective duration....a little higher expense ratio)...likely for $170K.

Therefore, the same horse rider, gets a different but almost identical horse and also gets almost 7 years of $3000 capital losses.

Summary:
Sell SCHP...get $20K capital loss.
Buy TIP...same duration...almost the same holdings.
Get $20K short term capital loss
5 minutes of work
What's not to like? (I know. TIP's Expense ratio is higher than SCHP's) (If this was real, I'd hold off until the monthly dividend was in my pocket.)
Because of the decrease in cost basis, you'll have to pay $20k*15% more in LTCG, what you can defer till the moment you cash out your total investment. Assume you cash it out after those 7 years. Then it's a good move if your tax bracket is higher than that. If not, it still may be better depending on the return and how long you hold your investments.

Once you get more than $3k*life_expectancy TLH, you have to wonder if it's really useful.

When you want to use the TLH to sell stocks and buy ETFs (like in my case), the dilemma is how many years you want to carry on those $3k benefits and how soon you want to buy those ETFs. I did some estimations of about 5 years, but it depends on many assumptions.
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: I don’t understand why tax loss harvesting is that beneficial

Post by hudson »

international001,
You are probably right, but I'm not sure that I follow.
All I can see is that I end up with about the same investment, and I get several years of $3K reductions in income.
User avatar
Lee_WSP
Posts: 10403
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Tax Loss Harvest Example

Post by Lee_WSP »

international001 wrote: Mon Nov 28, 2022 4:21 pm
hudson wrote: Sun Nov 27, 2022 8:25 am Let's say that I have a short term capital loss of $20,000 in SCHP...Schwab's 7.5 year effective duration and intermediate TIPS ETF.

I sell $170K of SCHP on Monday and get a $20,000 short term capital loss.
As soon as possible, I buy IShares TIP...at TIPS bond ETF (with a 7.26 years effective duration....a little higher expense ratio)...likely for $170K.

Therefore, the same horse rider, gets a different but almost identical horse and also gets almost 7 years of $3000 capital losses.

Summary:
Sell SCHP...get $20K capital loss.
Buy TIP...same duration...almost the same holdings.
Get $20K short term capital loss
5 minutes of work
What's not to like? (I know. TIP's Expense ratio is higher than SCHP's) (If this was real, I'd hold off until the monthly dividend was in my pocket.)
Because of the decrease in cost basis, you'll have to pay $20k*15% more in LTCG, what you can defer till the moment you cash out your total investment. Assume you cash it out after those 7 years. Then it's a good move if your tax bracket is higher than that. If not, it still may be better depending on the return and how long you hold your investments.

Once you get more than $3k*life_expectancy TLH, you have to wonder if it's really useful.

When you want to use the TLH to sell stocks and buy ETFs (like in my case), the dilemma is how many years you want to carry on those $3k benefits and how soon you want to buy those ETFs. I did some estimations of about 5 years, but it depends on many assumptions.
If your cap gains tax rate is lower, you win that arbitrage.
Piehole
Posts: 42
Joined: Mon Jun 17, 2019 8:30 pm

Re: I don’t understand why tax loss harvesting is that beneficial

Post by Piehole »

TropikThunder wrote: Sun Nov 27, 2022 11:13 am
Piehole wrote: Sat Nov 26, 2022 7:42 am I’m sure the brokerage houses like it, anything to get us to churn our accounts.
How does Vanguard make money if I exchange VTSAX for VFINX? There’s no transaction fee. I don’t see how the brokerage houses would care if I TLH’d or not.
I agree, no big deal exchanging one Vanguard fund for another. My comment was broad in nature. Some people TLH using individual stocks, ETF’s, or even open ended funds that charge sales fees.
dcabler
Posts: 4544
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: Tax Loss Harvest Example

Post by dcabler »

hudson wrote: Sun Nov 27, 2022 8:25 am Let's say that I have a short term capital loss of $20,000 in SCHP...Schwab's 7.5 year effective duration and intermediate TIPS ETF.

I sell $170K of SCHP on Monday and get a $20,000 short term capital loss.
As soon as possible, I buy IShares TIP...at TIPS bond ETF (with a 7.26 years effective duration....a little higher expense ratio)...likely for $170K.

Therefore, the same horse rider, gets a different but almost identical horse and also gets almost 7 years of $3000 capital losses.

Summary:
Sell SCHP...get $20K capital loss.
Buy TIP...same duration...almost the same holdings.
Get $20K short term capital loss
5 minutes of work
What's not to like? (I know. TIP's Expense ratio is higher than SCHP's) (If this was real, I'd hold off until the monthly dividend was in my pocket.)
Just a note regarding this example - TIP and SCHP track exactly the same index (as does FIPDX). Many here would urge caution here since the IRS hasn't explicitly ruled on whether this would be a trade of "substantially identical" funds and thus would result in a wash sale. I know that I wouldn't want to be a test case should I get audited.

Cheers.
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: Tax Loss Harvest Example

Post by hudson »

dcabler wrote: Wed Nov 30, 2022 5:24 am
hudson wrote: Sun Nov 27, 2022 8:25 am Let's say that I have a short term capital loss of $20,000 in SCHP...Schwab's 7.5 year effective duration and intermediate TIPS ETF.

I sell $170K of SCHP on Monday and get a $20,000 short term capital loss.
As soon as possible, I buy IShares TIP...at TIPS bond ETF (with a 7.26 years effective duration....a little higher expense ratio)...likely for $170K.

Therefore, the same horse rider, gets a different but almost identical horse and also gets almost 7 years of $3000 capital losses.

Summary:
Sell SCHP...get $20K capital loss.
Buy TIP...same duration...almost the same holdings.
Get $20K short term capital loss
5 minutes of work
What's not to like? (I know. TIP's Expense ratio is higher than SCHP's) (If this was real, I'd hold off until the monthly dividend was in my pocket.)
Just a note regarding this example - TIP and SCHP track exactly the same index (as does FIPDX). Many here would urge caution here since the IRS hasn't explicitly ruled on whether this would be a trade of "substantially identical" funds and thus would result in a wash sale. I know that I wouldn't want to be a test case should I get audited.

Cheers.
Thanks again dcabler!
Good point! I humbly don't believe that moving from SCHP to TIP is a violation. Maybe one of the Boglehead in-house CPAs or tax expert's will give an opinion. Or a Boglehead with a sharp eye will quote applicable tax guidelines. I've read tax laws wrongly before and was appropriately billed.

I probably won't pull the trigger until after SCHP's 2d December dividend pays out.

I'm also considering just buying half 10 year nominal treasuries and half 10 year TIPS and calling it a day. Right now at 75, my spending horizon averages 11 years. I'm thinking that my future is going to be in duration matched CDs, nominal treasuries, and TIPS...maybe in a convoluted non-rolling ladder.

Bottom Line: I'll probably do something even if it's wrong. It's sweet to bank several years of short term capital losses. I'll have to make a large note in my files so that I don't forget!
dcabler
Posts: 4544
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: Tax Loss Harvest Example

Post by dcabler »

hudson wrote: Wed Nov 30, 2022 6:02 am
dcabler wrote: Wed Nov 30, 2022 5:24 am
hudson wrote: Sun Nov 27, 2022 8:25 am Let's say that I have a short term capital loss of $20,000 in SCHP...Schwab's 7.5 year effective duration and intermediate TIPS ETF.

I sell $170K of SCHP on Monday and get a $20,000 short term capital loss.
As soon as possible, I buy IShares TIP...at TIPS bond ETF (with a 7.26 years effective duration....a little higher expense ratio)...likely for $170K.

Therefore, the same horse rider, gets a different but almost identical horse and also gets almost 7 years of $3000 capital losses.

Summary:
Sell SCHP...get $20K capital loss.
Buy TIP...same duration...almost the same holdings.
Get $20K short term capital loss
5 minutes of work
What's not to like? (I know. TIP's Expense ratio is higher than SCHP's) (If this was real, I'd hold off until the monthly dividend was in my pocket.)
Just a note regarding this example - TIP and SCHP track exactly the same index (as does FIPDX). Many here would urge caution here since the IRS hasn't explicitly ruled on whether this would be a trade of "substantially identical" funds and thus would result in a wash sale. I know that I wouldn't want to be a test case should I get audited.

Cheers.
Thanks again dcabler!
Good point! I humbly don't believe that moving from SCHP to TIP is a violation. Maybe one of the Boglehead in-house CPAs or tax expert's will give an opinion. Or a Boglehead with a sharp eye will quote applicable tax guidelines. I've read tax laws wrongly before and was appropriately billed.

I probably won't pull the trigger until after SCHP's 2d December dividend pays out.

I'm also considering just buying half 10 year nominal treasuries and half 10 year TIPS and calling it a day. Right now at 75, my spending horizon averages 11 years. I'm thinking that my future is going to be in duration matched CDs, nominal treasuries, and TIPS...maybe in a convoluted non-rolling ladder.

Bottom Line: I'll probably do something even if it's wrong. It's sweet to bank several years of short term capital losses. I'll have to make a large note in my files so that I don't forget!
The issue is that the tax regulations aren't specific on this case. Here's a writeup from Blackrock. Pay attention to the paragraph in the upper, righthand corner and the decision flowchart below it. https://www.blackrock.com/us/individual ... -en-us.pdf

Even then, they're not going to go out on a limb and say yay or nay, but instead pose it as degrees of risk.

In this case, SCHP, TIP, and FIPDX all track the same index. That means that they all 3 hold the same underlying bonds in very close to the same proportions. It would be analogous to selling Fidelity's SP500 fund and purchasing Vanguard's SP500 fund. This is covered by the rightmost branch in their flowchart and ends with "higher".

Cheers.
rkhusky
Posts: 17768
Joined: Thu Aug 18, 2011 8:09 pm

Re: Tax Loss Harvest Example

Post by rkhusky »

hudson wrote: Wed Nov 30, 2022 6:02 am I humbly don't believe that moving from SCHP to TIP is a violation. Maybe one of the Boglehead in-house CPAs or tax expert's will give an opinion. Or a Boglehead with a sharp eye will quote applicable tax guidelines. I've read tax laws wrongly before and was appropriately billed.

I probably won't pull the trigger until after SCHP's 2d December dividend pays out.

I'm also considering just buying half 10 year nominal treasuries and half 10 year TIPS and calling it a day. Right now at 75, my spending horizon averages 11 years. I'm thinking that my future is going to be in duration matched CDs, nominal treasuries, and TIPS...maybe in a convoluted non-rolling ladder.

Bottom Line: I'll probably do something even if it's wrong. It's sweet to bank several years of short term capital losses. I'll have to make a large note in my files so that I don't forget!
The burden of proof would be on the taxpayer to show that the two are not substantially identical. What argument would you use that SCHP and TIP are not substantially identical? And why take the chance when there are some many other options for replacements?
Post Reply