Don't let the tax tail wag the investment dog?

[splitwdw]

My only speculative purchase is Amazon. It’s grown into my largest single holding. I’m considering selling since it’s in an IRA. It’s a hard stock to sell with the growth it’s having. But it can’t go on forever.

Most of my individual stocks are in a taxable trading account.

 

[45th Birthday]

I can not understand some of the people on this forum talking about tax loss harvesting. Some of them talk about large losses. Maybe they have a lot more invested or speculate a lot. I too was fully invested in individual stocks in 2008/9 (still have a lot of individual stocks) and did not sell but did buy. The only loss I have right now is on some AT & T that I bought earlier this year and that's only about $1000. Are people on this forum selling some of their stock as soon as a loss shows? Maybe they do a lot more speculation than I do on their stock buys. I usually only have 1 speculative position in my stock trading account. VCEL was my last speculative trade bought for 2.24 and sold this past March for 9.24. I'm not retired and I have individual stocks in my trading account.

I harvested large losses during the crash. At the end of 2009, I had a loss carryover totaling seven figures, about 10% of the portfolio at the time. I do not own individual stocks. When harvesting the losses, I either swapped into similar ETFs or used options to re-establish the same position after the 30-day wash sale period expired. Nothing speculative at all about this process (or the fact that I had losses to begin with).

Of course, this means that the cost basis on these ETFs is painfully low should I decide to sell them now. I finally used up all the loss carryover sometime in 2017.

 

[audreyh1]

I can not understand some of the people on this forum talking about tax loss harvesting. Some of them talk about large losses. Maybe they have a lot more invested or speculate a lot. I too was fully invested in individual stocks in 2008/9 (still have a lot of individual stocks) and did not sell but did buy. The only loss I have right now is on some AT & T that I bought earlier this year and that's only about $1000. Are people on this forum selling some of their stock as soon as a loss shows? Maybe they do a lot more speculation than I do on their stock buys. I usually only have 1 speculative position in my stock trading account. VCEL was my last speculative trade bought for 2.24 and sold this past March for 9.24. I'm not retired and I have individual stocks in my trading account.

In 2008 and 2009 there was an opportunity to realize losses, yet buy another stock or fund or wait 31 days to reinvest to avoid wash sale rules. Some folks amassed huge tax losses yet effectively stayed invested or were out only briefly. These tax losses then were available for many years to offset taxable realized gains. Such opportunities don’t come around very often - it takes a large market drop to make it an option.

 

[Dash man]

In 2008 and 2009 there was an opportunity to realize losses, yet buy another stock or fund or wait 31 days to reinvest to avoid wash sale rules. Some folks amassed huge tax losses yet effectively stayed invested or were out only briefly. These tax losses then were available for many years to offset taxable realized gains. Such opportunities don’t come around very often - it takes a large market drop to make it an option.

Nobody can predict what will happen or how fast it can happen in the markets. I chose to stay put because I didn’t want to risk missing the bounce if it happened. I took advantage by adding new money instead. It worked well for me. Could I have done better by your method? Possibly. I don’t regret my decision and we’re plenty comfortable.

 

[audreyh1]

Nobody can predict what will happen or how fast it can happen in the markets. I chose to stay put because I didn’t want to risk missing the bounce if it happened. I took advantage by adding new money instead. It worked well for me. Could I have done better by your method? Possibly. I don’t regret my decision and we’re plenty comfortable.

I did a small amount of tax loss harvesting, but I could have done a lot more: simplified some things and moved more into index funds at the same time realizing tax losses to offset future gains. By changing funds I would not have missed any bounce.

 

[LOL!]

Nobody can predict what will happen or how fast it can happen in the markets. I chose to stay put because I didn’t want to risk missing the bounce if it happened. I took advantage by adding new money instead. It worked well for me. Could I have done better by your method? Possibly. I don’t regret my decision and we’re plenty comfortable.

You have outlined how you are happy to pay taxes that you didn't/don't have to pay. That's fine with me.

I tax-loss harvested in 2008-2009. I tax-loss harvested every single position in taxable accounts that had a loss. I stayed fully invested and even bought more equities. I did not miss any bounce.

For example, exchange Vanguard Total Stock Market Index fund at a loss into Vanguard Large-cap index fund. Or sell Vanguard Small-cap value index ETF at a loss and buy Ishares S&P small-cap 600 value index ETF immediately. At no time was I worried about missing a bounce nor did I change my asset allocation.

Those realized losses have helped me avoid taxation of any realized gains since. That's how tax-loss harvesting works. Successful investors do not have to pay taxes. And my gains far outweigh my losses. They are the same gains everybody else has except I don't pay taxes on them.

And there are other ways to do this. For example, if one has fixed income assets that they can use to rebalance into equities, then they can double up in a losing position and 31 days later sell some shares to get back to what they started with. If they sell the shares with the most losses, then they won't have to pay taxes. Of course, this is a lot more risky than a simple exchange into a similar, but not substantially identical replacement holding.

When one uses index funds, then it is trivial to find a replacement investment that is similar, but not substantially identical, to use when tax-loss harvesting. Indeed, for every position that I buy in my taxable account, I have already chosen a replacement investment in case I would need to tax-loss harvest whatever I bought. One can do the same thing with individual stocks such as sell F at a loss and buy GM if they want to, but I don't think one can expect two stocks to be as similar as two ETFs or index mutual funds.

And I do believe that NOT tax-loss harvesting in most instances is letting the tax tail wag the dog along with falling in the loss aversion trap. Many folks just don't like the extra transactions that they have to put on their tax returns and they also worry about wash sales.

 

[googily]

My only speculative purchase is Amazon. It’s grown into my largest single holding. I’m considering selling since it’s in an IRA. It’s a hard stock to sell with the growth it’s having. But it can’t go on forever.

Amazon was mine as well, and I sold the last of it earlier this year. It was on the dip, unfortunately, but they were shares we bought in 2001 so I was happy with the 3000% ROI. [emoji16]

 

[Dash man]

I did a small amount of tax loss harvesting, but I could have done a lot more: simplified some things and moved more into index funds at the same time realizing tax losses to offset future gains. By changing funds I would not have missed any bounce.

You must have done very well!

 

[audreyh1]

You must have done very well!

?

 

[Dash man]

?

Sorry, wrong quote. Meant for googily.

 

[googily]

Sorry, wrong quote. Meant for googily.

Would have done a whole lot better if we hadn't sold a big chunk of it in 2015, at (choke) $375!

 

[Scuba]

You have outlined how you are happy to pay taxes that you didn't/don't have to pay. That's fine with me.

I tax-loss harvested in 2008-2009. I tax-loss harvested every single position in taxable accounts that had a loss. I stayed fully invested and even bought more equities. I did not miss any bounce.

For example, exchange Vanguard Total Stock Market Index fund at a loss into Vanguard Large-cap index fund. Or sell Vanguard Small-cap value index ETF at a loss and buy Ishares S&P small-cap 600 value index ETF immediately. At no time was I worried about missing a bounce nor did I change my asset allocation.

Those realized losses have helped me avoid taxation of any realized gains since. That's how tax-loss harvesting works. Successful investors do not have to pay taxes. And my gains far outweigh my losses. They are the same gains everybody else has except I don't pay taxes on them.

And there are other ways to do this. For example, if one has fixed income assets that they can use to rebalance into equities, then they can double up in a losing position and 31 days later sell some shares to get back to what they started with. If they sell the shares with the most losses, then they won't have to pay taxes. Of course, this is a lot more risky than a simple exchange into a similar, but not substantially identical replacement holding.

When one uses index funds, then it is trivial to find a replacement investment that is similar, but not substantially identical, to use when tax-loss harvesting. Indeed, for every position that I buy in my taxable account, I have already chosen a replacement investment in case I would need to tax-loss harvest whatever I bought. One can do the same thing with individual stocks such as sell F at a loss and buy GM if they want to, but I don't think one can expect two stocks to be as similar as two ETFs or index mutual funds.

And I do believe that NOT tax-loss harvesting in most instances is letting the tax tail wag the dog along with falling in the loss aversion trap. Many folks just don't like the extra transactions that they have to put on their tax returns and they also worry about wash sales.

Thank you for sharing this. I have not done this in the past but it exchanging one ETF for another similar one sounds like a great strategy. From a tax law perspective, if one sells a particular S&P 500 index ETF and buys another one, will that work? Or does it have to be a bit different - ie sell S&P 500, buy Russell 1000?

 

[LOL!]

Thank you for sharing this. I have not done this in the past but it exchanging one ETF for another similar one sounds like a great strategy. From a tax law perspective, if one sells a particular S&P 500 index ETF and buys another one, will that work? Or does it have to be a bit different - ie sell S&P 500, buy Russell 1000?

I don't think there is any tax law precedent for that and internet forum responders bloviate about it all the time. Is SPY different from VOO different from IVV .... and on and on. Does it even matter since VOO is clearly different from VV or SCHB or VTI?

 

[mrfeh]

Thank you for sharing this. I have not done this in the past but it exchanging one ETF for another similar one sounds like a great strategy. From a tax law perspective, if one sells a particular S&P 500 index ETF and buys another one, will that work? Or does it have to be a bit different - ie sell S&P 500, buy Russell 1000?

Run a search (either here or on bogleheads.org); this topic is often discussed.

The official wording is something like "substantively different"t. Folks can interpret that in different ways. Personally, I would not sell one S&P 500 fund and buy another.

 

[Scuba]

OK, I’ll do more research on this.