Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

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JayDee37
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Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by JayDee37 »

I have some long-term losses right now and am wondering whether there is any reason not to harvest them. In the past I have only harvested short term losses, both to offset short term gains as well as offsetting regular income.

My understanding is that capital losses are first directed towards losses of the same term (short to short, long to long), then directed towards any remaining capital losses (e.g. if your short term gains are greater than your short term losses and you still have long term losses on the books, those LT losses will offset the ST gains), and then directed to offset up to $3K/year of regular income. (Please let me know if this understanding is mistaken.)

I can see how it might be less optimal to have short term losses offsetting long term gains, since for many people LT gains are likely to be taxed at a lower rate than their regular income, thus using the ST losses this way is not as beneficial as offsetting regular income. But is there any reason not to harvest LT losses if those losses will be offsetting ST or LT gains, or regular income? Again, I can see how offsetting regular income (vs LT gains) is better if your marginal tax bracket is higher than your LT tax rate.

I guess if you harvest LT losses and those proceeds are subsequently reinvested in some similar (but not substantially the same :wink: ) holding, you have now reset the clock and are creating short-term gains/losses and non-qualified dividends... And by selling your LT holdings that have a loss you are foreclosing on the likelihood that they will become LT gains and be taxed at that lower rate in the future... How much do these sorts of things matter when making TLH decisions?

Are there any other drawbacks or things to be aware of when considering harvesting LT and/or ST losses?

Thanks as always for your sharing your knowledge!
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rkhusky
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by rkhusky »

You should harvest losses of either type whenever there’s enough there to make it worth your time.
livesoft
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by livesoft »

The main thing about LT losses is that you should almost never have any of them because

a. You harvested losses that were ST before they became LT, and

b. Your shares would have had to drop to below the price you purchased them more than a year, so typically that is a pretty big drop. That's why I put "almost" in my first sentences.

Yes, I think people who have loss aversion do have more instances of LT losses because they hold on to losers when they shouldn't.

Of course, it is perfectly OK to have unrealized LT losses in your tax-advantaged accounts because there really isn't any tax-advantage to realize those LT losses, but see sentence above about loss aversion.
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Artsdoctor
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by Artsdoctor »

livesoft wrote: Tue Jun 06, 2023 2:21 pm The main thing about LT losses is that you should almost never have any of them because

a. You harvested losses that were ST before they became LT, and

b. Your shares would have had to drop to below the price you purchased them more than a year, so typically that is a pretty big drop. That's why I put "almost" in my first sentences.

Yes, I think people who have loss aversion do have more instances of LT losses because they hold on to losers when they shouldn't.

Of course, it is perfectly OK to have unrealized LT losses in your tax-advantaged accounts because there really isn't any tax-advantage to realize those LT losses, but see sentence above about loss aversion.
I think that you'll usually have mostly short-term losses but long-term losses can occur even if someone's a pretty active TLHer. For example, let's say I buy a fund with an NAV of 50 in January 2020. 2020 might be a pretty lackluster year with perhaps a 1% gain so one year later, the NAV is 50.50. But then 2021 has a common correction of about 10% and the NAV is then 45. The shares are over one year old but I dutifully TLH--and capture the long-term loss.

Last year was an interesting year for bond funds. I held tax-exempt funds which had gains for many years but then sold shares that were quite old when the bond market had its little fit--for a long-term capital loss.
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by VanGar+Goyle »

Artsdoctor wrote: Tue Jun 06, 2023 2:32 pm
livesoft wrote: Tue Jun 06, 2023 2:21 pm The main thing about LT losses is that you should almost never have any of them because

a. You harvested losses that were ST before they became LT, and

b. Your shares would have had to drop to below the price you purchased them more than a year, so typically that is a pretty big drop. That's why I put "almost" in my first sentences.
I think that you'll usually have mostly short-term losses but long-term losses can occur even if someone's a pretty active TLHer. For example, let's say I buy a fund with an NAV of 50 in January 2020. 2020 might be a pretty lackluster year with perhaps a 1% gain so one year later, the NAV is 50.50. But then 2021 has a common correction of about 10% and the NAV is then 45. The shares are over one year old but I dutifully TLH--and capture the long-term loss.

Last year was an interesting year for bond funds. I held tax-exempt funds which had gains for many years but then sold shares that were quite old when the bond market had its little fit--for a long-term capital loss.
Or 11 of the last 14 years for some total bond funds that dropped over 16%. Past performance does not guarantee future results
but I fear that some new investors may be learning the wrong lessons.
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JayDee37
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by JayDee37 »

Thanks for the replies thus far.

It sounds like there is no real drawback to harvesting LT losses if that's what you have.

I am not terribly diligent about keeping track of unrealized losses in my taxable brokerage as I only contribute money when I have a windfall and then just let it ride--most of my investing happens in retirement accounts through paycheck deductions and I rebalance in my tax-favored accounts as well. So I don't check the brokerage lots very often. The past few years I have sold from the brokerage in January to generate my annual Roth IRA contribution and have done some tax-loss harvesting during that process.

BUT...I received a windfall a few weeks ago and have been going through my various accounts in more detail to figure out what I need to do to maintain the overall portfolio at my desired AA once the windfall gets put into stocks in the brokerage. And I saw that I have a couple thousand dollars of unrealized losses in VTSAX from lots purchased in summer 2021 (with a different windfall)! If I had been paying closer attention I would have caught this earlier when the losses were larger. Oh well.
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Artsdoctor
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by Artsdoctor »

JayDee37 wrote: Tue Jun 06, 2023 3:00 pm Thanks for the replies thus far.

It sounds like there is no real drawback to harvesting LT losses if that's what you have.

I am not terribly diligent about keeping track of unrealized losses in my taxable brokerage as I only contribute money when I have a windfall and then just let it ride--most of my investing happens in retirement accounts through paycheck deductions and I rebalance in my tax-favored accounts as well. So I don't check the brokerage lots very often. The past few years I have sold from the brokerage in January to generate my annual Roth IRA contribution and have done some tax-loss harvesting during that process.

BUT...I received a windfall a few weeks ago and have been going through my various accounts in more detail to figure out what I need to do to maintain the overall portfolio at my desired AA once the windfall gets put into stocks in the brokerage. And I saw that I have a couple thousand dollars of unrealized losses in VTSAX from lots purchased in summer 2021 (with a different windfall)! If I had been paying closer attention I would have caught this earlier when the losses were larger. Oh well.
You're still going to benefit from capturing the loss. Go ahead and do it, and just keep track of your capital gain/loss tally.
livesoft
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by livesoft »

JayDee37 wrote: Tue Jun 06, 2023 3:00 pm.... If I had been paying closer attention I would have caught this earlier when the losses were larger. Oh well.
Tip: One doesn't have to pay any attention at all because Vanguard computers will send you a message when you want to know if your shares may have a loss. That is, Vanguard and other brokerages will e-mail or text you an alert at a price point that you set. Set this alert up once and forget about it. One can be blissfully unaware until one gets the alert message.
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km91
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by km91 »

livesoft wrote: Tue Jun 06, 2023 2:21 pm Yes, I think people who have loss aversion do have more instances of LT losses because they hold on to losers when they shouldn't.

Of course, it is perfectly OK to have unrealized LT losses in your tax-advantaged accounts because there really isn't any tax-advantage to realize those LT losses, but see sentence above about loss aversion.
Ideally you would want to zero out and crystalize ST/LT gains in a tax preferred account where there are no tax implications for doing so, and crystalize ST/LT losses in a taxable account where you can harvest the loss. You can even take it a step further and harvest a gain in a tax advantaged account but repurchase the position in a taxable account, and harvest a loss in a taxable account and repurchase the position in a tax advantaged account so that you only take gains in the tax preferred account and only take losses in the taxable account
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by rkhusky »

km91 wrote: Tue Jun 06, 2023 4:19 pm… and harvest a loss in a taxable account and repurchase the position in a tax advantaged account …
Subject to wash sale constraints = no purchase of substantially identical replacement within +- 30 days of the sale for a loss in the taxable account.
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by km91 »

rkhusky wrote: Tue Jun 06, 2023 5:24 pm
km91 wrote: Tue Jun 06, 2023 4:19 pm… and harvest a loss in a taxable account and repurchase the position in a tax advantaged account …
Subject to wash sale constraints = no purchase of substantially identical replacement within +- 30 days of the sale for a loss in the taxable account.
Right, subject to wash sale rules. With a portfolio of ETFs it shouldn't bee too difficult to find pairs of funds to do this with that comply with the rules. My understanding is that "substantially identical" means securities with the same CUSIP in the eyes of the IRS, meaning funds from different providers that track the same index are OK. But for most broad market funds it should be relatively easy to find replacement indexes and fund providers that substantially track the same thing
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by rkhusky »

km91 wrote: Tue Jun 06, 2023 5:41 pm
rkhusky wrote: Tue Jun 06, 2023 5:24 pm
km91 wrote: Tue Jun 06, 2023 4:19 pm… and harvest a loss in a taxable account and repurchase the position in a tax advantaged account …
Subject to wash sale constraints = no purchase of substantially identical replacement within +- 30 days of the sale for a loss in the taxable account.
Right, subject to wash sale rules. With a portfolio of ETFs it shouldn't bee too difficult to find pairs of funds to do this with that comply with the rules. My understanding is that "substantially identical" means securities with the same CUSIP in the eyes of the IRS, meaning funds from different providers that track the same index are OK. But for most broad market funds it should be relatively easy to find replacement indexes and fund providers that substantially track the same thing
Aren’t securities with the same CUSIP identical? Substantially identical is less identical than identical.
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by km91 »

rkhusky wrote: Tue Jun 06, 2023 7:46 pm
km91 wrote: Tue Jun 06, 2023 5:41 pm
rkhusky wrote: Tue Jun 06, 2023 5:24 pm
km91 wrote: Tue Jun 06, 2023 4:19 pm… and harvest a loss in a taxable account and repurchase the position in a tax advantaged account …
Subject to wash sale constraints = no purchase of substantially identical replacement within +- 30 days of the sale for a loss in the taxable account.
Right, subject to wash sale rules. With a portfolio of ETFs it shouldn't bee too difficult to find pairs of funds to do this with that comply with the rules. My understanding is that "substantially identical" means securities with the same CUSIP in the eyes of the IRS, meaning funds from different providers that track the same index are OK. But for most broad market funds it should be relatively easy to find replacement indexes and fund providers that substantially track the same thing
Aren’t securities with the same CUSIP identical? Substantially identical is less identical than identical.
My understanding is that "substantially identical" is not the IRS rule, that to be out of compliance you need to repurchase the same CUSIP, ie the exact same security. Even something as blatant as selling BP on the NYSE and repurchasing on the LSE would not run against the wash sale rule, but I'm not going to test it. I think you can be reasonably sure that swapping fund providers on the same underlying index is probably OK, and swapping funds between MSCI, FTSE, Russell, and CRSP indexes is almost certainly allowed
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by placeholder »

km91 wrote: Tue Jun 06, 2023 10:45 pm My understanding is that "substantially identical" is not the IRS rule, that to be out of compliance you need to repurchase the same CUSIP, ie the exact same security. Even something as blatant as selling BP on the NYSE and repurchasing on the LSE would not run against the wash sale rule, but I'm not going to test it. I think you can be reasonably sure that swapping fund providers on the same underlying index is probably OK, and swapping funds between MSCI, FTSE, Russell, and CRSP indexes is almost certainly allowed
Your understanding is incorrect so I'd recommend reading the irs publications on the wash sale rules although you have basically outlined the required wash sale reporting for brokerages.
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by rkhusky »

km91 wrote: Tue Jun 06, 2023 10:45 pm
rkhusky wrote: Tue Jun 06, 2023 7:46 pm
km91 wrote: Tue Jun 06, 2023 5:41 pm
rkhusky wrote: Tue Jun 06, 2023 5:24 pm
km91 wrote: Tue Jun 06, 2023 4:19 pm… and harvest a loss in a taxable account and repurchase the position in a tax advantaged account …
Subject to wash sale constraints = no purchase of substantially identical replacement within +- 30 days of the sale for a loss in the taxable account.
Right, subject to wash sale rules. With a portfolio of ETFs it shouldn't bee too difficult to find pairs of funds to do this with that comply with the rules. My understanding is that "substantially identical" means securities with the same CUSIP in the eyes of the IRS, meaning funds from different providers that track the same index are OK. But for most broad market funds it should be relatively easy to find replacement indexes and fund providers that substantially track the same thing
Aren’t securities with the same CUSIP identical? Substantially identical is less identical than identical.
My understanding is that "substantially identical" is not the IRS rule, that to be out of compliance you need to repurchase the same CUSIP, ie the exact same security. Even something as blatant as selling BP on the NYSE and repurchasing on the LSE would not run against the wash sale rule, but I'm not going to test it. I think you can be reasonably sure that swapping fund providers on the same underlying index is probably OK, and swapping funds between MSCI, FTSE, Russell, and CRSP indexes is almost certainly allowed
The wash sale law uses the expression “substantially identical”, as does IRS Pub 550. The courts have ruled that non-identical securities trigger wash sales. See https://www.bogleheads.org/wiki/Wash_sale.

Brokerages are only required to report wash sales involving identical securities within the same account. The taxpayer is required to report all wash sales.
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by km91 »

rkhusky wrote: Wed Jun 07, 2023 6:52 am
km91 wrote: Tue Jun 06, 2023 10:45 pm
rkhusky wrote: Tue Jun 06, 2023 7:46 pm
km91 wrote: Tue Jun 06, 2023 5:41 pm
rkhusky wrote: Tue Jun 06, 2023 5:24 pm
Subject to wash sale constraints = no purchase of substantially identical replacement within +- 30 days of the sale for a loss in the taxable account.
Right, subject to wash sale rules. With a portfolio of ETFs it shouldn't bee too difficult to find pairs of funds to do this with that comply with the rules. My understanding is that "substantially identical" means securities with the same CUSIP in the eyes of the IRS, meaning funds from different providers that track the same index are OK. But for most broad market funds it should be relatively easy to find replacement indexes and fund providers that substantially track the same thing
Aren’t securities with the same CUSIP identical? Substantially identical is less identical than identical.
My understanding is that "substantially identical" is not the IRS rule, that to be out of compliance you need to repurchase the same CUSIP, ie the exact same security. Even something as blatant as selling BP on the NYSE and repurchasing on the LSE would not run against the wash sale rule, but I'm not going to test it. I think you can be reasonably sure that swapping fund providers on the same underlying index is probably OK, and swapping funds between MSCI, FTSE, Russell, and CRSP indexes is almost certainly allowed
The wash sale law uses the expression “substantially identical”, as does IRS Pub 550. The courts have ruled that non-identical securities trigger wash sales. See https://www.bogleheads.org/wiki/Wash_sale.

Brokerages are only required to report wash sales involving identical securities within the same account. The taxpayer is required to report all wash sales.
The expression "substantially identical" is used in the rule, though it is not defined and open to interpretation. The court cases cited in the wiki all involve bonds of similar maturity from the same issuer. I have never heard of anyone being hit with a wash sale for swapping ETFs on the same index and I know for a fact large asset managers TLH using similar trades to the BP one I described above. Here's a Propublica article that shows Goldman using the exact same underlying stock to tax loss harvest. Obviously that's aggressive but presumably Goldman's compliance department thought they were on firm enough ground to get away with it. I wouldn't press my luck that far, but I think we can be reasonably sure that swapping fund providers on the same index is OK. If you don't want to take that risk swapping funds on different but similar enough indexes is almost certain to be OK. If you have examples of the IRS challenging either of these implementations I'd be interested in reading them
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by rkhusky »

km91 wrote: Wed Jun 07, 2023 10:47 am Here's a Propublica article that shows Goldman using the exact same underlying stock to tax loss harvest. Obviously that's aggressive but presumably Goldman's compliance department thought they were on firm enough ground to get away with it.
Nice article. But it was not the exact same stock, it was different share classes of the same company, which have been available for decades. And Goldman acknowledged it crossed their comfort level and went back and refigured their client’s taxes.

The article also states that there is debate amongst financial advisors about using funds following the same index, indicating it’s on the edge of legality. It seems foolish to take the chance when there are so many alternatives that are close enough.
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by km91 »

rkhusky wrote: Wed Jun 07, 2023 12:45 pm
km91 wrote: Wed Jun 07, 2023 10:47 am Here's a Propublica article that shows Goldman using the exact same underlying stock to tax loss harvest. Obviously that's aggressive but presumably Goldman's compliance department thought they were on firm enough ground to get away with it.
Nice article. But it was not the exact same stock, it was different share classes of the same company, which have been available for decades. And Goldman acknowledged it crossed their comfort level and went back and refigured their client’s taxes.

The article also states that there is debate amongst financial advisors about using funds following the same index, indicating it’s on the edge of legality. It seems foolish to take the chance when there are so many alternatives that are close enough.
Sure, different share classes of the same underlying company which is much more blatant than swapping VOO for IVV. GS only acknowledged they may have crossed a line when they were publicly called out for it, would they still be doing it today if the article had never published? You're right, it's trivially easy to find alternatives that don't track the same index, but if you really needed to there is little to suggest that swapping funds using the same index is a for sure violation of the rule. This Blackrock document suggests that doing so puts you at higher risk of violating the rule so an investor should weigh that accordingly when choosing fund pairs to TLH with
rkhusky
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by rkhusky »

km91 wrote: Wed Jun 07, 2023 1:10 pm
Sure, different share classes of the same underlying company which is much more blatant than swapping VOO for IVV.
I think it depends on the difference between the two share classes. Seems like I’ve read that if you can swap one share class for another, then it would be a wash sale, like Vanguard’s Investor and Admiral classes. In this case, there was a voting rights difference. I seem to recall that difference being discussed vis-a-vis the wash sale law, but don’t remember where.
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JayDee37
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by JayDee37 »

livesoft wrote: Tue Jun 06, 2023 4:09 pm
JayDee37 wrote: Tue Jun 06, 2023 3:00 pm.... If I had been paying closer attention I would have caught this earlier when the losses were larger. Oh well.
Tip: One doesn't have to pay any attention at all because Vanguard computers will send you a message when you want to know if your shares may have a loss. That is, Vanguard and other brokerages will e-mail or text you an alert at a price point that you set. Set this alert up once and forget about it. One can be blissfully unaware until one gets the alert message.
I did not know that. Thanks for the tip! :D
Tell me, what is it you plan to do with your one wild and precious life? | ~Mary Oliver
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Re: Benefits/Drawbacks of Tax Loss Harvesting Long- vs Short-Term Losses?

Post by placeholder »

We've had the discussion many times about substantially identical securities and anyone interested can look that up so I don't think another one would be useful here.
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