Florida Orange wrote: ↑Sun Jul 31, 2022 5:27 pm
Yes Chip I have read the wiki. And you're right, money is fungible. Which means Morik could have used the $20 he saved in taxes to buy shares of investment "B" or he could have used it to buy lunch. Or he could have put it in the bank. And he could have used any amount of money from his bank account to buy shares of investment "B" or anything else he wanted. Saving money on taxes is great. Investing money is great. But since money is fungible, investing any amount of money from any source is a separate transaction. He lost money on investment "A" and made the loss less bad by tax loss harvesting. It seems to me that what he does with that money (or any other money he has) is immaterial to that fact. I do see the reason for tax loss harvesting. My point is that it doesn't make you money, it merely decreases the impact of the loss.
I'm not sure how to explain it other than I already have, but you are not correct by any reasonable definition of 'loss'.
You have $20 you
wouldn't otherwise have had. Sure you could pull $20 from somewhere else, but we aren't talking about that.
Tax loss harvesting
does not reduce your invested position.
Money is fungible and your invested assets are exchangeable for money. You
have already lost the value whether you sell or not.
You seem to be thinking that if you don't sell it, you haven't actually lost anything. This isn't the case.
Now of course if you change your investment position by selling and taking that money out of the portfolio, then you won't have whatever future growth that investment would have had. This is generally what people are talking about when they say you haven't really lost anything if you don't sell--if you sell you 'lock in' the loss and
miss out on the [potential] recovery/future growth. (As an aside, this whole thing about not really having lost money is mental gymnastics--money is fungible, the assets are liquid and exchangeable for a certain amount of money. If the assets can be exchanged for less money, you own less total monetary value than you did before.)
But that is not what is happening with TLH. Yes, if you have money around you can put it in and of course a larger investment amount will grow more, but that isn't what we are talking about. We are talking about taking a series of actions that results in a larger investment amount being in the portfolio
with no money coming out of your pocket.
I'm going to re-paste my earlier post. Note that
no outside money is flowing into the portfolio from your pockets. (Yes, you are putting money in that the government hands you for realizing that loss on A, but this money wasn't available to you without selling A.)
No harvest:
I bought $100 worth of investment 'A".
The current market value of my investment in 'A' is $50.
Ending state: I hold investments currently worth $50 with a cost basis of $100.
Harvest:
I bought $100 worth of investment 'A".
The current market value of my investment in 'A' is $50.
I identify investment 'B' which I find similar enough to 'A' to substitute for it long term (but isn't 'substantially identical' in terms of wash sale rules).
I sell my $50 of 'A' and buy $50 of 'B'.
I can claim a $50 loss against my income right now, or to offset other gains. I invest the proceeds (say $20 if I used the $50 loss to offset income at a 40% total tax rate).
Ending state: I hold investments currently worth $70 with a cost basis of $70.
Let's say I grow for 20 years and the money quadruples in that time.
The no harvest scenario I sell my $50*4=$200 and pay $15 in LTCG on the $100 gain (basis was $100), so end up with $185 (assuming 15% LTCG tax rate).
The harvest scenario I sell my $70*4=$280 and pay $31.50 in LTCG on the $210 gain (basis was $70) and end up with $248.50.
Please explain how I have lost money by doing the 'harvest' scenario instead of the 'no harvest' scenario. In either scenario
no outside money is flowing into or out of the portfolio. I have not ponied up additional capital.
If it helps, consider a larger amount of money and someone who has a super precise budget such that every single penny they can afford to invest has already been invested. Let's say their marginal tax rate is 25%. They bought $10k worth of A, which is now worth $7k.
No harvest: They hold onto A. They have $7k investment with $10k cost basis.
Harvest: They sell A, buy similarly-performing investment B for $7k + invest the $750 they get from claiming the $3k loss on A against their income. Now they have a $7.75k investment with cost basis of $7.75k.
Time passes, investments A & B are both worth twice as much now.
No harvest: The $7k grew to $14k. The basis is $10k, they sell and pay LTCG (15%) on $4k gain, which is $600. Ending value: $14000 - $600 = $13400
Harvest: The $7.75k grew to $15.5k. The basis is $7.75k. They sell and pay LTCG (15%) on $7.75k gain, which is $1162.50. Ending value: $15500 - $1162.50 = $14337.5.
This investor has ended up with an extra $937.50 that they wouldn't have otherwise had. They did not lose money by tax loss harvesting--they gained money. This did not require moving
any outside cash from their pockets into the portfolio. It is
on top of any other money they can afford to put into the portfolio.