I have an ordinary stock bond portfolio and looking at rebalancing as some of my stock ETFs are way over my target allocations. On the other hand my bonds have gone down a bit since I bought them. I see that if I sold all my bonds and then some of my stock etfs I would pretty much have no capital gains tax liability. I would then rebuy my bonds the next day to bring me back to my target bond allocation.
Just wanted to know if this is standard practice out there. I know that when stocks go up bonds often go down so it seems to make sense that you would sell and then rebuy your bonds to limit tax liabilities when rebalancing during a good year for stocks. Id say the tax savings for the FY would more than offset the trading costs.
I am actually in Australia but I understand that the capital gains tax rules are pretty similar in the US
Tax loss harvesting during rebalancing [Australia]
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Re: Tax loss harvesting during rebalancing
In the US you can't tax loss harvest and buy back the same fund within 31 days or it will be a Wash Sale. You can read the Wiki to find more detail. You will need to determine the rules in Australia.
What you propose to do to offset gains with losses is a good move.
https://www.bogleheads.org/wiki/Tax_loss_harvesting
Cheers
What you propose to do to offset gains with losses is a good move.
https://www.bogleheads.org/wiki/Tax_loss_harvesting
Cheers
Re: Tax loss harvesting during rebalancing
Jaymover,Jaymover wrote: ↑Fri Jul 16, 2021 3:00 am I have an ordinary stock bond portfolio and looking at rebalancing as some of my stock ETFs are way over my target allocations. On the other hand my bonds have gone down a bit since I bought them. I see that if I sold all my bonds and then some of my stock etfs I would pretty much have no capital gains tax liability. I would then rebuy my bonds the next day to bring me back to my target bond allocation.
Just wanted to know if this is standard practice out there. I know that when stocks go up bonds often go down so it seems to make sense that you would sell and then rebuy your bonds to limit tax liabilities when rebalancing during a good year for stocks. Id say the tax savings for the FY would more than offset the trading costs.
I am actually in Australia but I understand that the capital gains tax rules are pretty similar in the US
I'd like to break apart your question into two parts: 1) Re-balancing, and 2) Tax-loss harvesting (TLH).
1) Re-balancing in a taxable account is challenging due to the potential tax liability it incurs. It's generally advisable to hold off on selling appreciated holdings with significant unrealized capital gains for the sole purpose of re-balancing. Usually, investors own several tax-advantaged accounts with enough overlap with taxable holdings that sufficient portfolio re-balancing can be accomplished in these other accounts to avoid generating a tax bill by selling holdings with gains in a taxable account.
Do you have any other accounts besides the taxable account? If so, can you use them to re-balance, and thus avoid selling taxable holdings with gains?
2) I don't know the tax laws in Australia. However, here in the US, the wash sale rule prevents claiming losses on the sale of stock if you purchase substantially identical replacement stock within 30 days before or after the sale of stock at a loss. So your thought to re-purchase your losing bond holdings after 1 day would not work here; your loss would be disallowed here. You could find a replacement bond fund that is not substantially identical and exchange your losing bond holdings into that. That would allow you to claim the loss in the US.
If you were in the US, I'd recommend that you go ahead and harvest the losses from the bond funds, but not to "waste" the losses on unrealized capital gains that you do not have to realize. Instead, the losses might be put to better use (i.e. save more in taxes) by offsetting ordinary income. However, that's based on US laws.
Maybe this should be posted in the non-US investing forum?
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
Re: Tax loss harvesting during rebalancing [Australia]
This thread is now in the Non-US Investing (Australia). I retitled the thread so readers won't miss that the OP is outside the US.
Note the statement at the top of the wiki page: Tax loss harvesting
Note the statement at the top of the wiki page: Tax loss harvesting
Here's the official source for Australia: Capital gains tax | Australian Taxation OfficeThis article contains details specific to United States (US) investors. It does not apply to non-US investors.
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Re: Tax loss harvesting during rebalancing [Australia]
As I understand it, in Australia, if your primary purpose of selling an asset and rebuying is to gain a tax advantage, it is not allowed (known as a "wash sale").
However, if you sell down for another purpose and happen to get a tax advantage, that is ok.
So if you sold down VGB and bought IGB (both Australian government bond funds), I imagine that would almost certainly be considered a wash sale and not allowed.
If you had an Australian bond fund and changed to a global bond fund to increase the international diversification of your bonds or because you are worried about the Australian economy in the near future, that may be ok.
Or if you sold an international aggregate (i.e. both government and corporate) bond fund and bought an Australian government bond fund because you thought that bonds from the Australian government were safer (they have one of the highest ratings in the world), that may be ok.
I don't know what would happen if you switched back and forth every so often, though.
Disclaimer: I am NOT an accountant, and it's worth speaking to an accountant who has specific experience with this (or maybe even a financial planner who is qualified to give tax advice - they exist but are rare, but I do know of one).
However, if you sell down for another purpose and happen to get a tax advantage, that is ok.
So if you sold down VGB and bought IGB (both Australian government bond funds), I imagine that would almost certainly be considered a wash sale and not allowed.
If you had an Australian bond fund and changed to a global bond fund to increase the international diversification of your bonds or because you are worried about the Australian economy in the near future, that may be ok.
Or if you sold an international aggregate (i.e. both government and corporate) bond fund and bought an Australian government bond fund because you thought that bonds from the Australian government were safer (they have one of the highest ratings in the world), that may be ok.
I don't know what would happen if you switched back and forth every so often, though.
Disclaimer: I am NOT an accountant, and it's worth speaking to an accountant who has specific experience with this (or maybe even a financial planner who is qualified to give tax advice - they exist but are rare, but I do know of one).
Re: Tax loss harvesting during rebalancing
I also have a super (401K equivalent account). It is actually free to rebalance within my untaxed account. However the irony is that as I age my AA reduces and I am buying up defensive low return assets in my untaxed account. I figure that it is actually better to have more aggressive investments in the untaxed account and more of the low return balanced as liquid and taxable. It is diametrically opposed unfortunately which makes rebalancing difficult. If I had a larger savings rate I would keep hoarding cash in my CD as a way to keep my AA on track.iceport wrote: ↑Fri Jul 16, 2021 10:01 amJaymover,Jaymover wrote: ↑Fri Jul 16, 2021 3:00 am I have an ordinary stock bond portfolio and looking at rebalancing as some of my stock ETFs are way over my target allocations. On the other hand my bonds have gone down a bit since I bought them. I see that if I sold all my bonds and then some of my stock etfs I would pretty much have no capital gains tax liability. I would then rebuy my bonds the next day to bring me back to my target bond allocation.
Just wanted to know if this is standard practice out there. I know that when stocks go up bonds often go down so it seems to make sense that you would sell and then rebuy your bonds to limit tax liabilities when rebalancing during a good year for stocks. Id say the tax savings for the FY would more than offset the trading costs.
I am actually in Australia but I understand that the capital gains tax rules are pretty similar in the US
I'd like to break apart your question into two parts: 1) Re-balancing, and 2) Tax-loss harvesting (TLH).
1) Re-balancing in a taxable account is challenging due to the potential tax liability it incurs. It's generally advisable to hold off on selling appreciated holdings with significant unrealized capital gains for the sole purpose of re-balancing. Usually, investors own several tax-advantaged accounts with enough overlap with taxable holdings that sufficient portfolio re-balancing can be accomplished in these other accounts to avoid generating a tax bill by selling holdings with gains in a taxable account.
Do you have any other accounts besides the taxable account? If so, can you use them to re-balance, and thus avoid selling taxable holdings with gains?
2) I don't know the tax laws in Australia. However, here in the US, the wash sale rule prevents claiming losses on the sale of stock if you purchase substantially identical replacement stock within 30 days before or after the sale of stock at a loss. So your thought to re-purchase your losing bond holdings after 1 day would not work here; your loss would be disallowed here. You could find a replacement bond fund that is not substantially identical and exchange your losing bond holdings into that. That would allow you to claim the loss in the US.
If you were in the US, I'd recommend that you go ahead and harvest the losses from the bond funds, but not to "waste" the losses on unrealized capital gains that you do not have to realize. Instead, the losses might be put to better use (i.e. save more in taxes) by offsetting ordinary income. However, that's based on US laws.
Maybe this should be posted in the non-US investing forum?
Probably overthinking it all
Re: Tax loss harvesting during rebalancing
I also have a super (401K equivalent account). It is actually free to rebalance within my untaxed account. However the irony is that as I age my AA reduces and I am buying up defensive low return assets in my untaxed account. I figure that it is actually better to have more aggressive investments in the untaxed account and more of the low return balanced as liquid and taxable. It is diametrically opposed unfortunately which makes rebalancing difficult. If I had a larger savings rate I would keep hoarding cash in my CD as a way to keep my AA on track.iceport wrote: ↑Fri Jul 16, 2021 10:01 amJaymover,Jaymover wrote: ↑Fri Jul 16, 2021 3:00 am I have an ordinary stock bond portfolio and looking at rebalancing as some of my stock ETFs are way over my target allocations. On the other hand my bonds have gone down a bit since I bought them. I see that if I sold all my bonds and then some of my stock etfs I would pretty much have no capital gains tax liability. I would then rebuy my bonds the next day to bring me back to my target bond allocation.
Just wanted to know if this is standard practice out there. I know that when stocks go up bonds often go down so it seems to make sense that you would sell and then rebuy your bonds to limit tax liabilities when rebalancing during a good year for stocks. Id say the tax savings for the FY would more than offset the trading costs.
I am actually in Australia but I understand that the capital gains tax rules are pretty similar in the US
I'd like to break apart your question into two parts: 1) Re-balancing, and 2) Tax-loss harvesting (TLH).
1) Re-balancing in a taxable account is challenging due to the potential tax liability it incurs. It's generally advisable to hold off on selling appreciated holdings with significant unrealized capital gains for the sole purpose of re-balancing. Usually, investors own several tax-advantaged accounts with enough overlap with taxable holdings that sufficient portfolio re-balancing can be accomplished in these other accounts to avoid generating a tax bill by selling holdings with gains in a taxable account.
Do you have any other accounts besides the taxable account? If so, can you use them to re-balance, and thus avoid selling taxable holdings with gains?
2) I don't know the tax laws in Australia. However, here in the US, the wash sale rule prevents claiming losses on the sale of stock if you purchase substantially identical replacement stock within 30 days before or after the sale of stock at a loss. So your thought to re-purchase your losing bond holdings after 1 day would not work here; your loss would be disallowed here. You could find a replacement bond fund that is not substantially identical and exchange your losing bond holdings into that. That would allow you to claim the loss in the US.
If you were in the US, I'd recommend that you go ahead and harvest the losses from the bond funds, but not to "waste" the losses on unrealized capital gains that you do not have to realize. Instead, the losses might be put to better use (i.e. save more in taxes) by offsetting ordinary income. However, that's based on US laws.
Maybe this should be posted in the non-US investing forum?
Probably overthinking it all