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Tax Loss Harvest Question
Old 11-24-2008, 11:08 AM   #1
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Tax Loss Harvest Question

I've been thinking of converting some of my small cap index funds and S&P 500 index fund into a total stock market index fund to harvest the capital loss. But as I understand it in the future(when I sell shares at a price that i hope is higher than what I initially paid) I would owe more capital gains tax than if I simply held on to what i own now. Doesn't this place me at risk that cap gains rate may increase in the future? The last few months have significantly increased the time to ER for me. I am very comfortable with the buy and hold philosophy. If selling now would increase my future cap gains liability I would rather just hold on now. I'd appreciate any thoughts.
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Old 11-24-2008, 11:56 AM   #2
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Originally Posted by Beer man View Post
I've been thinking of converting some of my small cap index funds and S&P 500 index fund into a total stock market index fund to harvest the capital loss. But as I understand it in the future(when I sell shares at a price that i hope is higher than what I initially paid) I would owe more capital gains tax than if I simply held on to what i own now. Doesn't this place me at risk that cap gains rate may increase in the future? The last few months have significantly increased the time to ER for me. I am very comfortable with the buy and hold philosophy. If selling now would increase my future cap gains liability I would rather just hold on now. I'd appreciate any thoughts.
Yes, by decreasing your "basis" (the price you paid for the stock), you'l be increasing the amount of cap gains that is subject to taxes when you sell the stock. The impact of this move will be increased if the cap gains tax rate increases (as it seems is likely to happen).

Possibly offsetting impacts (that is, reasons you still might want to consider doing the tax loss harvesting):
- It may reduce the amount of income tax you have to pay this year. The losses can be used t offset any cap gains you might have, then up to $3000 can be used against ordinary income. You can carry forward any remainder to use in future years. Thus, if you are in the 25% marginal tax bracket, that deduction will reduce your taxes by $750. That's $750 you can use to buy more equities while their prices are beaten down. The future gain on this investment might make it worth paying taxes on the decreased basis in the future.
- If it's likely your marginal tax rate will go up in the future (maybe you've been adding up the cost of the govt bailouts and all the "free" goodies that have been promised to everyone), those $3000/year carry-forward deductions might have more vale than they would today.
- Similarly, if your income tax rate is going to be lower hen you sell these stocks (e.g. maybe you have ERed and now making less money), then the decreased basis on your investment won't be such a big deal.

Nothing's certain. I'm probably going to do some tax loss harvesting on my solo 401K account this week, and faced the same issues. Good luck!
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Old 11-24-2008, 12:15 PM   #3
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Nothing's certain. I'm probably going to do some tax loss harvesting on my solo 401K account this week, and faced the same issues. Good luck!
How do you do tax loss harvesting in a 401K account?
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Old 11-24-2008, 12:37 PM   #4
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How do you do tax loss harvesting in a 401K account?

TLH is for taxable accounts only.
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Old 11-24-2008, 12:59 PM   #5
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How do you do tax loss harvesting in a 401K account?
from travelover:
Quote:
TLH is for taxable accounts only.
Ooops. I guess you can't. Another good idea right down the crapper.
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Old 11-24-2008, 01:07 PM   #6
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Old 11-24-2008, 01:14 PM   #7
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Originally Posted by Beer man View Post
I've been thinking of converting some of my small cap index funds and S&P 500 index fund into a total stock market index fund to harvest the capital loss. But as I understand it in the future(when I sell shares at a price that i hope is higher than what I initially paid) I would owe more capital gains tax than if I simply held on to what i own now. Doesn't this place me at risk that cap gains rate may increase in the future? The last few months have significantly increased the time to ER for me. I am very comfortable with the buy and hold philosophy. If selling now would increase my future cap gains liability I would rather just hold on now. I'd appreciate any thoughts.
Beer Man.....you might want to check this out
Bogleheads :: View topic - TLH - It's Not for Everybody

just to make sure TLH is appropriate in your situation. It may very well be , but perhaps not.......
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Old 11-25-2008, 05:33 AM   #8
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Thanks everyone for your comments. The Bogleheads forum was quite helpful. Another question. I've been hit by the alternative minimum tax the last few years. Does the capital lose deduction go away with the AMT? Also, does it make any difference if the losses are short or long term? That is can I sell shares I bought in August and still claim the loss?
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Old 11-25-2008, 07:21 AM   #9
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I am going to do the same and sell some losers for the tax benefit and adjust my portfolio too.
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Old 11-25-2008, 08:37 AM   #10
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Thanks everyone for your comments. The Bogleheads forum was quite helpful. Another question. I've been hit by the alternative minimum tax the last few years. Does the capital lose deduction go away with the AMT? Also, does it make any difference if the losses are short or long term? That is can I sell shares I bought in August and still claim the loss?
As far as I can tell, it doesn't matter if the losses are ST or LT since they get added together in the end (assuming both are losses). So for August, it's ok but if it gets too recent (within 30 days or so of the sell date), then you might have to worry about wash sale issues. AMT......I'm not sure about this. My gut feeling is that probably it works the same way. Maybe Martha will be along to answer this. Otherwise try asking at
fairmark.com
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Old 11-25-2008, 10:31 AM   #11
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Sure, future cap gains tax rates are an issue, but what about offsetting today's cap gains? For mutual-fund investors, a tax-loss swap helps ease the pain of being bitten twice by mutual fund losses along with a huge end-of-year cap gains distribution.

Quote:
Originally Posted by friar1610 View Post
How do you do tax loss harvesting in a 401K account?
The closest answer to that question is a Roth IRA conversion.

We just finished a tax-loss swap, managing to lose money each time, and have probably wiped out cap gains for at least the next couple of years. As I was totaling up the losses on Form 1040 I realized that we have more room for another incremental Roth IRA conversion-- not only is our modified AGI lower, but the IRA's unrealized gains are quite a bit lower today than they were last year.
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Old 11-25-2008, 10:52 AM   #12
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For mutual-fund investors, a tax-loss swap helps ease the pain of being bitten twice by mutual fund losses along with a huge end-of-year cap gains distribution.
This is why I hold all my mutual funds (other than MM funds) in tax-deferred accounts. I want more control over the timing and nature of these cash flows.
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