Anyone considering tax-loss selling?

[Nords]

Business Week has jumped on the doom & gloom bandwagon with an article about "[-]Black[/-] Bloody Tuesday", the quarterly redemption deadline for many hedge funds:
Look Out for Bloody Tuesday - BusinessWeek

While a redemptions run on the market seems to be a bit of a reach, I have no trouble believing that stock-market performance will generally suck over the next 3-24 months. Reinvest those dividends!

Another exploit for prolonged sideways/down conditions is tax-loss selling. On one hand, we're only down 4% YTD. OTOH, about half of that is a batch of cap losses (in a taxable account) of a dividend ETF (DVY) that's had the snot pounded out of it in the last year. It's a long-term holding and there's no compelling reason to mess with that. Hypothetically we could sell the loser shares, sit on the perch for 31 days, book the loss, and then buy back in. Not only would we save a few thousand bucks on cap gains taxes, we'd be able to raise the dividend yield of our shares by a few basis points.

My motivation is offsetting the impending long-term cap-gains tax on Berkshire Hathaway shares that we sold earlier this year. But today's cap gains tax rates are arguably at an all-time low and I'm pretty much just polishing cannonballs to save a bit of spending money. We've already reduced some of the tax bill by accelerating charitable donations and hedging part of our state tax bill with some investment credits. (Thanks, Clif!) Of course a large recovery over the next three months would [-]piss me off[/-] punish me for being a dirty market timer.

I'm facing the same ambivalence over a few shares of Tate & Lyle PLC (ADR TATYY), the maker of artificial sweetener Splenda. We've enjoyed several years of 4-5% yields on this stock but it's been hammered by declining margins, changing EU sugar regulations, a host of copycats, and litigation. It'd also be easy to book this loss and buy more shares of an international dividend ETF like PID, although admittedly the resulting yield would be less than TATYY.

I should assess the benefits of the cap-gains loss against the impact of the change in the tax rate of any qualified dividends that I get around the dates of the tax-loss selling/buying. The dividends may be taxed at the higher non-qualified dividend tax rate, but I'm not sure if that indeed is an issue.

Anyone else contemplating this move? Any "gotchas" I'm missing?

 

[Gone4Good]

I was considering kicking out Vanguard's International Explorer fund and moving in to the International Index. I only have losses in that fund (which I've owned for years) because they have a habit of generating huge taxable gains when times are good. I've had 15%+ distribution some years. Although I like the idea of an international small cap allocation, it is terribly tax inefficient.

Haven't done anything yet, though.

 

[freebird5825]

i'm eyeing my stake in the Janus overseas fund that carries a higher expense ratio (.89) than i normally pay. the fund is a leftover of my beginner's mistakes way back when. this just may be the excuse i need to dump it. otherwise, no likely targets in my sights.
sorry i can't help with the rest - beyond my knowledge.

 

[JB]

I've been thinking about this and finally pulled the trigger last Thursday. I had some long term gains from managed funds I sold earlier in the year. I decided to sell some ETFs and buy back similar investments so my allocation stays the same. Unfortunately, the market made some big moves up before I could buy back in. It's come back down somewhat but is still higher than the level I sold at. I would have been better off doing nothing.

 

[LOL!]

Tax-loss harvesting has been a major theme over on the BogleCult forum for many weeks. Lots of threads started on the theme (pretty much like this one). I have harvested about about $60K in losses in this year. I have a few more to go. My rule is to sell on a big down day, then buy the replacement shares within minutes.

I do this religiously, so that my portfolio rarely has any red numbers by the time January rolls around. I also like that the IRS pays for part of my losses.

 

[FIREd]

I have VG developed markets (VDMIX) and VG Emerging markets (VEIEX) that have seen some big losses in the last 12 months. I was thinking about doing some TLH on those, but so far I have been reluctant to make a move because the markets are just too volatile.

But here is the deal: someone on the Diehard board said that it would be OK to sell those 2 funds and immediately buy VG total international index (VGTSX) without triggering the wash sale rule. It wouldn't mess my asset allocation much by doing that exchange, but do you think that VGTSX is different enough from VDMIX + VEIEX?

 

[LOL!]

Absolutely yes. No wash sale.

 

[Moemg]

I have been toying with the idea since I'd like to add a little to my cash reserves just not sure which fund is the target yet .

 

[FIREd]

Excellent. And if markets keep going down I might go back to VEIEX+VDMIX next year.

 

[JB]

Excellent. And if markets keep going down I might go back to VEIEX+VDMIX next year.

The nice thing about the mutual funds is that have your trade executed at the end of the day, so are less impacted by market volatility. With ETFs it might be better to wait for the market to calm down, or risk loss, like I had.

 

[Nords]

I would have been better off doing nothing.

Yeah, spouse's opinion is "You just can't leave this stuff alone, can you, Nords?!?"

 

[audreyh1]

Unfortunately (or fortunately) I don't have any investment to take a loss on except for my bond funds darn it!

By the way - that article is yet another alarming headline with no meat. They admit - well actually hedge funds have 90 days to return the money. So the "Bloody Tuesday" deadline is completely spurious.

And, IMO, hedge funds have been selling stocks to meet redemptions for at least a month now - witness the drop in commodity prices. They will probably continue to do so for the rest of the year. It has nothing to do with this magic date. I think the markets have been anticipating this as well (not saying it's all discounted, but somewhat discounted).

I'm more concerned about end-of-quarter and financial company reporting where they get to mark-to-market yet again. That's where the quarter end date (Tues) is kind of scary and why Capitol Hill has that deadline. (or is it Capital Hill?)

Audrey

 

[Nords]

As an object lesson to us dirty market timers, I arose this morning (Monday 29 Sep 08) intending to make a fairly large DVY sale. The market was down a couple hundred points at 11 AM (ET), as usual, and it didn't seem like a big deal. I started looking at the trade and the tax-loss numbers, got distracted by other things, and didn't get back to it until 4 PM ET.

When I refreshed the page on my ticker symbols, I thought the market was down 77 points. No big deal. Then I blinked my eyes and realized that I was missing a decimal point-- whoa dude indeed. Our ER portfolio took a 4% one-day loss, which may be in the top five of our 25-year track record.

I would've sold at $54-$55/share and watched the price crater down to $52. Then the fun would've started-- waiting 30 days for the wash-sale rule. The idea of a tax-loss sale is to not only to book the loss but to repurchase the shares cheaper. I suspect that in 30 days, after Congress gets over its despair, DVY's price would go up enough to make me sorry that I was trying to save a few thousand in taxes.

I have to admit, though, that I'm quite happy DVY and our other ETFs are shelling out a dividend on Wednesday. I bet those reinvest at a pretty good price.

Guess I'm gonna wait a while until the dead cat bounces a little higher. Or perhaps I may never do this at all.

 

[haha]

I have done quite a bit of pairs trading. Wherever I have a good sized loss and there is a good substitute trading similarly low I switch. I isn't the happiest of exercise, but I think it is a good idea.

Ha

 

[FUEGO]

I tried to sell for some capital gains recently (to take advantage of the 0% federal capital gains tax rates in effect now). I failed, and ended up booking a tax loss. I'm hoping to have gains later this year so I can sell and take advantage of the 0% bracket while it exists.

 

[RustyShackleford]

I would've sold at $54-$55/share and watched the price crater down to $52. Then the fun would've started-- waiting 30 days for the wash-sale rule. The idea of a tax-loss sale is to not only to book the loss but to repurchase the shares cheaper. I suspect that in 30 days, after Congress gets over its despair, DVY's price would go up enough to make me sorry that I was trying to save a few thousand in taxes.

Nords, this seems very unlikely ... but it KINDA sounds like you are
unfamiliar with the concept of buying "replacement funds" to keep
your position in the market while you're waiting for the wash-sale
period to run out. For example, you could replace DVY with VYM.

On a related note, I'd argue that "the idea ... to repurchase the
shares cheaper" is basically market-timing. Selling something with
the idea that the market will go down and then you'll rebuy it - that's
market timing, whether you rebuy the same thing, or something
similar. Not to break balls.

And I'm sorry for your losses ...

 

[Dawg52]

On one hand, we're only down 4% YTD. OTOH, about half of that is a batch of cap losses (in a taxable account) of a dividend ETF (DVY) that's had the snot pounded out of it in the last year.

Your only down 4%? If you don't mind me asking, what are you invested in?

 

[Nords]

Nords, this seems very unlikely ... but it KINDA sounds like you are unfamiliar with the concept of buying "replacement funds" to keep your position in the market while you're waiting for the wash-sale period to run out. For example, you could replace DVY with VYM.

I'm familiar with it. VYM is good, and I was idly considering buying iShares' energy & retail-banking ETFs as well. Not to yank on anyone's chain but DVY was down 8.2% today while VYM seems to have closed at the same price as yesterday-- why the heck is that?!?

Another effect of buying a "replacement fund" is that you might get to realize the cap losses... twice! That worked like a champ through most of 2001-2, and that's what I was looking forward to until the market got started without me today.

Or we'd realize a long-term cap loss on the first transaction, the markets would go screaming up, and we'd give a bunch of it back on the second transaction to pay taxes on a short-term cap gain-- not that there's anything wrong with taking a cap gain. I prefer the first scenario but this one works too. It's just a bit of extra work.

On a related note, I'd argue that "the idea ... to repurchase the shares cheaper" is basically market-timing. Selling something with the idea that the market will go down and then you'll rebuy it - that's market timing, whether you rebuy the same thing, or something
similar. Not to break balls.

Yep, that's the whole reason for this thread. I need to talk through the logic, and maybe to talk myself out of it.

And I'm sorry for your losses ...

Thanks, but no problems.

It's kinda strange. I expected to have much more of a reaction than I've actually had. We were pretty excited in Oct 1987 and the market re-opening of 17 Sep 2001 certainly got our attention. A few years ago I might've gone on margin to jump into the fray. But this one... feh. I kinda wish I had another 10% cash to dump into it but I'm certainly not gonna break into our CDs (or the kid's college fund) to do so. If we make another year's SWR in the next month (or lose it) I don't see our spending or our standard of living changing a bit.

Spouse commented on the market during the PBS rundown this evening, and I said "Well, we're down another 4% in one day, lemme tell you what I was thinking about." Her reaction was pretty much the same: "Eh, no reason to work so hard for another percent or two." After six years we seem pretty comfortable in our ER rut and this would have to get a lot nastier to provoke any changes. We have enough, we have our version of UncleMick's testosterone-poisoned assets on the fringes, and there's not any reason to work any harder for money that we'd probably end up giving to charity anyway.

I guess we've become inured to market volatility, certainly aided by a COLA'd pension and a good set of tenants in our rental property. There might be a lesson in that for the annuity crowd and the real estate zealots. But I wonder what our tenants think of having to choose between paying their rent or shoring up their retirement portfolio.

Your only down 4%? If you don't mind me asking, what are you invested in?

Well, yesterday we were down 3.5% YTD and today it's down 7.5%. We're also down 23% from our all-time high last summer, which was pretty darn high. But we haven't had a down year since 2002.

26% Berkshire Hathaway (we'd sell down to 23% if it got to 28%, if for no other reason than to buy the stuff that's below its allocation)
19% Powershares International Dividend ETF (PID)
22% Dow Jones Select Dividend ETF (DVY)
17% S&P600 Small-cap Value ETF (IJS)
3% TSP small-cap "S" fund
4% split among Intel, Superior Industrial (SUP), and Tate & Lyle (TATYY), which we're gradually whittling down to zero,
1% angel investment (they just cashed the check), and
8% cash.

After 22 years of mutual funds, we've just finished getting out of them for all ETFs & stocks. We've been working toward 23% among each of BRK, PID, DVY, & IJS with 8% in cash. Ideally if an asset reached 18% or 28% then we'd rebalance it back to 23%. The angel investing is relatively new and we haven't decided how high we're going to let it get, but probably no more than 10% over the next few years.

Every year we've made the portfolio a little simpler and traded a little less... still haven't decided where I'm going with the angel investing but it's taught me a heckuva lot in a very short time.

 

[Dawg52]

Well, yesterday we were down 3.5% YTD and today it's down 7.5%. We're also down 23% from our all-time high last summer, which was pretty darn high. But we haven't had a down year since 2002.

26% Berkshire Hathaway (we'd sell down to 23% if it got to 28%, if for no other reason than to buy the stuff that's below its allocation)
19% Powershares International Dividend ETF (PID)
22% Dow Jones Select Dividend ETF (DVY)
17% S&P600 Small-cap Value ETF (IJS)
3% TSP small-cap "S" fund
4% split among Intel, Superior Industrial (SUP), and Tate & Lyle (TATYY), which we're gradually whittling down to zero,
1% angel investment (they just cashed the check), and
8% cash.

After 22 years of mutual funds, we've just finished getting out of them for all ETFs & stocks. We've been working toward 23% among each of BRK, PID, DVY, & IJS with 8% in cash. Ideally if an asset reached 18% or 28% then we'd rebalance it back to 23%. The angel investing is relatively new and we haven't decided how high we're going to let it get, but probably no more than 10% over the next few years.

Every year we've made the portfolio a little simpler and traded a little less... still haven't decided where I'm going with the angel investing but it's taught me a heckuva lot in a very short time.

Good old Warren Buffett. Wish I had invested with him a few years ago. Almost did but then I kept thinking about how old he was getting and was afraid he might retire or drop dead and then what? 7.5% down not bad with pretty much an all equity portfolio. I'm down 13.7% YTD and 16% from last years high with a 50/50 blend. Stupid me rode down a couple of stocks that have really been hammered. The perils of owning individual stocks.

If/when I ever get close to what I had early this year, I'm trimming way back. Probably no more than 25% equities. Call me a gutless investor if you like, but it's just not worth it. I slept maybe 2 hours last night.

 

[W2R]

Good old Warren Buffett. Wish I had invested with him a few years ago.

Berkshire Hathaway sure has done well for Nords and others that bought in early.

If/when I ever get close to what I had early this year, I'm trimming way back. Probably no more than 25% equities. Call me a gutless investor if you like, but it's just not worth it. I slept maybe 2 hours last night.

I don't think that is gutless at all!! I think that is smart. People need more sleep than that, even if it means cutting back a little on withdrawal rate.

 

[Rambler]

I have a couple financials that have been hammered (guess who...), that I certainly won't mind harvesting for tax loss...problem is that there's nothing left of them to buy replacements with...

R

 

[ERD50]

My alternate view on tax-loss selling:

Remember, if you do a kind of 'trade' to a similar (but not identical) investment, that new investment now has the low cost basis. So yes, you can harvest the tax loss for this year, but the flip side is, you created a larger profit in that replacement investment.

Now that might be fine, especially if you had some other big gains that you sold this year (what are the odds of that?). But think about that increased tax down the road.

I expect taxes to go higher in the future. Do I *really* want to push gains into the future? Maybe, maybe not - I think it's worth thinking about. There is no free lunch with this, just delaying the bill a while. That delay may come at a price.

-ERD50

 

[Nords]

Good old Warren Buffett. Wish I had invested with him a few years ago. Almost did but then I kept thinking about how old he was getting and was afraid he might retire or drop dead and then what?

Berkshire Hathaway sure has done well for Nords and others that bought in early.

So... forget 1999-2002... where were you guys a month or two ago when "B" shares were trading in the $3800s?

The perpetual impression seems to be that the train has left the station and/or is heading for a derailment. Reading Miles' "The Warren Buffett CEO" may put your mind at ease about the succession issue, and a copy of Schroeder's "The Snowball" is less than $20 at Amazon.

The stuff he's publicly buying now will drop to Berkshire's bottom line like a ton of bricks over the next couple years. Every one of his CEOs is allocating his capital to scoop their competitors. I'm sure that he's taking advantage of the credit crisis to buy dollar bills for 30-40 cents, and we won't hear about it for weeks or months until the SEC requires disclosure. The housing market will recover. Insurance premiums will go up. Consumers will keep buying.

There are many worse places to put UncleMick's testosterone. Five years from now Buffett (and his successor) will look like a genius again. If you buy now, you could too...

 

[ziggy29]

So... forget 1999-2002... where were you guys a month or two ago when "B" shares were trading in the $3800s?

The perpetual impression seems to be that the train has left the station and/or is heading for a derailment. Reading Miles' "The Warren Buffett CEO" may put your mind at ease about the succession issue, and a copy of Schroeder's "The Snowball" is less than $20 at Amazon.

The stuff he's publicly buying now will drop to Berkshire's bottom line like a ton of bricks over the next couple years.

Yep. The 1973-74 bear market might have been the best thing that ever happened to Berkshire shareholders.

I think this also speaks to why Berkshire tends to do very well in bear markets.

As for the mortality/succession thing, that is probably a little overstated. Plus, Berkshire is set up in a way that Buffett has essentially ZERO involvement in operations of its businesses. All he does, for the most part, is make investment decisions with its capital. That's obviously a very important thing, but his departure won't impact the day-to-day operations of Berkshire's businesses one bit.

[disclaimer: long eight shares of BRKB, the first of them circa 1999 for less than 1400 when investors felt Buffett was "out of touch" for not loading up on tech stocks]

 

[haha]

Since most people here use funds or ETFs, I can't imagine why they wouldn't want to realize capital losses by making a same day switch from one vehicle in the same asset class to another; if they have losses to realize, and if their tax position would benefit from the losses.

It's a long term interest free loan from the govt that may never have to be repaid.

Ha