Tax Loss Harvesting --- Deciding when to do it

[always_learning]

When do you decide to TLH?

I have never TLH before and have been reading about it but most of the info out there is a bit murky and doesn’t get into the topic of when it’s a good idea to do this. Past threads on this site and the info on Bogleheads have helped but I still don’t know why/when people decide to do it as opposed to just waiting out a rebound. And the info on avoiding wash sales is really vague.

We have a Mutual Fund that is way down from when we put money in last year (to the tune of > 60,000 ‘loss’) and I was thinking about TLH and then buying back in after 31 days. We would hold it in cash until the 31 days had passed. Is the benchmark all we have to consider in not creating a wash sale? Our SP 500 will be paying some DIV soon but the fund I'm considering for TLH follows the Russell.

We have other taxable mutual funds that typically throw off lots of year-end DIV/CG but I obviously have no idea what this year will do. We are also doing Roth conversions to the top of the 24% bracket, so a tax break on any DIV/CG would be nice.

So, when do you decide it’s a good idea to TLH? Would you TLH now or wait to see what happens with the fund and year-end DIV/CG?

Also, does TT handle this for us when it’s most likely going to involve a multiple-year carryover or will I have to have more info/calculations handy in subsequent years?

 

[FLSUnFIRE]

I did after the 08 crash. I was using tax act at the time and it carried forward losses for quite a few years. I didn't consider distributions but since same fund family I think that would have been a wash. I saved my working tax rate writing off against earned income and now that I'm FIREd the CGs will be 0% if I manage my withdrawals well. I'm glad I did it.

 

[Dash man]

I just did some TLH last week on some stocks that were under water. I sold the stocks for the tax break and to use the money to pay the tax on some large Roth conversions. The money I didn’t use for taxes I reinvested into SCHB.
If you plan to reinvest the money after you sell, I wouldn’t wait 31 days. I’d find another fund or stock to invest in. You never know what will happen over that 31 days, so unless you plan to keep it in cash for safety reasons, I recommend you find a different place to invest. It only needs to be a little different to avoid the wash sale rule.

 

[jebmke]

I always TLH to something that gives me comparable exposure to what I am selling; I don't go to cash. No hard and fast rule but if a holding hits 5K of unrealized loss it gets my attention.

In 2008 and 2009 I made several round trips and accumulated massive losses from US and non-US stock funds. As a result, it would be unlikely that I would see any losses in equity. I did harvest some bond losses this year though.

 

[njhowie]

When do you decide to TLH?

It's a type of market timing. If you've decided that you're going to do it, best to either do it immediately, or plan a date/window of when you will do it in the future regardless of what the share price is.

 

[Dash man]

It's a type of market timing. If you've decided that you're going to do it, best to either do it immediately, or plan a date/window of when you will do it in the future regardless of what the share price is.

+1
If I had $60k in losses in my taxable account, I’d take it all now, and immediately invest in a different fund or stock. Similar, but different.

 

[Montecfo]

I did some in the fall, and have done some this year. It is always a good time.

But don't leave yourself out of the market. Stay Fully Invested.

I did some tax loss harvesting earlier on money center banks and regional banks. After selling I bought a big bank ETF and a regional bank ETF.

Those are both up. That way you are not losing market exposure.

It is not market timing but even of it were, that's such an overwrought term in these parts. Ignore the naysayers. Enjoy LTCG rates on gains and ordinary losses (up to 3k annually).

 

[Phroig]

I’d take the loss now and buy a fund/ETF that tracks a slightly different index. If you like your current fund, you can switch back in 31 days.

 

[Montecfo]

I’d take the loss now and buy a fund/ETF that tracks a slightly different index. If you like your current fund, you can switch back in 31 days.

It can track the same index. Undoubtedly it will have some what different holdings, different managers, tactics, etc.

 

[RunningBum]

I agree with all the posts that you should be investing in something similar, yet different enough to not trigger a wash sale. Otherwise you run the potential of selling low and buying high, quite possibly losing more money than your tax loss harvesting savings.

 

[Phroig]

It can track the same index. Undoubtedly it will have some what different holdings, different managers, tactics, etc.

https://www.kitces.com/blog/the-was...ubstantially-identical-mutual-funds-and-etfs/

Better safe than sorry, especially when potentially dealing with the IRS.

 

[corn18]

I just did some TLH. Easy decision for me because I TLH out of a fund I didn't want anymore (FZROX Fidelity Zero Total Market Index) into a fund I did want (FSKAX Fidelity Total Market Index). I wanted out of the FZROX in my taxable account because it is not portable.

 

[RetiredAt49]

Isn’t the TLH limit $3,000 - meaning that you can only drop/lower your income $3,000/year?

My brokerage account dropped hundreds of thousands due to this latest market drop and my wealth management company said we could TLH but the limit of the drop/loss is only $3,000/year even if we could show a loss of $100k or more.

Not sure it’s worth it but perhaps I don’t understand the advantages

 

[Sunset]

Isn’t the TLH limit $3,000 - meaning that you can only drop/lower your income $3,000/year?

My brokerage account dropped hundreds of thousands due to this latest market drop and my wealth management company said we could TLH but the limit of the drop/loss is only $3,000/year even if we could show a loss of $100k or more.

Not sure it’s worth it but perhaps I don’t understand the advantages

He didn't mention you could sell some capital gains and have them balanced off by the losses, and if any TLH money is left over, then up to $3,000 of it can be used against regular income. Any more left over gets carried over to the next year.

 

[RetiredAt49]

He didn't mention you could sell some capital gains and have them balanced off by the losses, and if any TLH money is left over, then up to $3,000 of it can be used against regular income. Any more left over gets carried over to the next year.

And there in lies my question…. If I sold $100,000 dollars worth of equities out of my brokerage account, let’s say $50,000 of it was a capital gain and $50,000 was a loss, would I report $47,000 (which is the $3,000 limit) as income/gain or $0?

 

[corn18]

And there in lies my question…. If I sold $100,000 dollars worth of equities out of my brokerage account, let’s say $50,000 of it was a capital gain and $50,000 was a loss, would I report $47,000 (which is the $3,000 limit) as income/gain or $0?

You would report $0. The losses offset the gains. There is no limit on how much of the losses you can use to offset capital gains, even if they are carryover losses. This is pretty clear for an IRS pub:

https://www.irs.gov/taxtopics/tc409

 

[Montecfo]

https://www.kitces.com/blog/the-was...ubstantially-identical-mutual-funds-and-etfs/

Better safe than sorry, especially when potentially dealing with the IRS.

There is no controlling authority to support the author's opinion, and he cites none. But IRS says securities issued by different corporations would not ordinarily trigger wash sale rules.

Never mind they will use different management, different methods to track, report different returns,etc.

https://www.investopedia.com/terms/s/substantiallyidenticalsecurity.asp

It is about understanding your risk more than anything, and that risk appears to be quite small since IRS has made no contrary ruling in the 40+ years that index funds have existed or the 90 or so years mutual funds have existed.

 

[mathjak107]

Always be careful kicking the tax can down the road ….that is what tax loss harvesting does .

It simply reduces your costs on the next deal you buy .

In our case kicking the fax can down the road bit us in the butt .

They went and raised the capital gains taxes from 15% to 23.80 on the level of gain we had.

The best is tax gain harvesting..that is where you take profits if you can in the zero capital gains bracket

 

[COcheesehead]

Keep in mind if your income is under about $80k for married filing jointly, your cap gains rate is 0. So tax loss harvesting has less of a benefit in those situations. You should be gain harvesting.

Mathjak is also correct in that if you let gains get so big, they could bounce you into the 20% bracket, plus the 3.8% excise tax, plus whatever your state dings you. I had that happen once, it’s not pretty.

 

[COcheesehead]

Isn’t the TLH limit $3,000 - meaning that you can only drop/lower your income $3,000/year?

My brokerage account dropped hundreds of thousands due to this latest market drop and my wealth management company said we could TLH but the limit of the drop/loss is only $3,000/year even if we could show a loss of $100k or more.

Not sure it’s worth it but perhaps I don’t understand the advantages

They were wrong. Losses are applied against cap gains. Any excess losses are carried forward and applied against cap gains. If you still have excess, $3000 of the losses can be applied to income in any one year.

I tax loss harvested in 2008 and used those up through 2016.

 

[pb4uski]

Yes, they were wrong. If you have a net capital loss or net capital loss carryforward that is not offst by gains then $3,000 each year is used to offset ordinary income. My aunt and uncle swore off of stocks in 2008 and still have a loss carryforward that is being whittled down at $3,000 a year.

Worst case if you have crystalized tax losses (over 31 days old) then you can sell some positions and realize gains equal to the cryastilized loss and then immediately buy back the same securites and end up with a higher basis at zero tax cost.

 

[always_learning]

Wow. Thanks everyone!

I just did some TLH last week on some stocks that were under water. I sold the stocks for the tax break and to use the money to pay the tax on some large Roth conversions. The money I didn’t use for taxes I reinvested into SCHB.
If you plan to reinvest the money after you sell, I wouldn’t wait 31 days. I’d find another fund or stock to invest in. You never know what will happen over that 31 days, so unless you plan to keep it in cash for safety reasons, I recommend you find a different place to invest. It only needs to be a little different to avoid the wash sale rule.

I guess we'll reinvest in something, then, as you and everyone else suggest. I am just so scared to create a wash sale that I figured it would be better to just hold it for a few weeks, especially with the amount of loss we would realize.

Keep in mind if your income is under about $80k for married filing jointly, your cap gains rate is 0. So tax loss harvesting has less of a benefit in those situations. You should be gain harvesting.

Mathjak is also correct in that if you let gains get so big, they could bounce you into the 20% bracket, plus the 3.8% excise tax, plus whatever your state dings you. I had that happen once, it’s not pretty.

With our Roth conversions we are not in line for the 0% gains rate, but thanks for the heads up on that.

I doubt this fund would create such a large gain that it would impact the extra dings you and Mathjack mentioned, but that's also good to keep in mind.






So, getting back to avoiding a wash sale... after reading all of your replies, I read several Kitces articles and one from Investopedia, and it sounds like we could choose a fund at the same brokerage with different benchmarks and different managers even though the top holdings are the same and we'd be OK? Specifically, the 'loser' is a Growth Fund and the other one we like is a Growth Index Fund that will be paying DIV in just a few weeks. Or are those too similar?

 

[COcheesehead]

Wow. Thanks everyone!



I guess we'll reinvest in something, then, as you and everyone else suggest. I am just so scared to create a wash sale that I figured it would be better to just hold it for a few weeks, especially with the amount of loss we would realize.



With our Roth conversions we are not in line for the 0% gains rate, but thanks for the heads up on that.

I doubt this fund would create such a large gain that it would impact the extra dings you and Mathjack mentioned, but that's also good to keep in mind.






So, getting back to avoiding a wash sale... after reading all of your replies, I read several Kitces articles and one from Investopedia, and it sounds like we could choose a fund at the same brokerage with different benchmarks and different managers even though the top holdings are the same and we'd be OK? Specifically, the 'loser' is a Growth Fund and the other one we like is a Growth Index Fund that will be paying DIV in just a few weeks. Or are those too similar?

I hit the 20% cap gains bracket as the result of a RE transaction so with RE being as it is, you might hit that number because it’s the total of all your cap gains, not just one singular investment. You never know,

 

[Dash man]

I guess we'll reinvest in something, then, as you and everyone else suggest. I am just so scared to create a wash sale that I figured it would be better to just hold it for a few weeks, especially with the amount of loss we would realize.

With our Roth conversions we are not in line for the 0% gains rate, but thanks for the heads up on that.

I doubt this fund would create such a large gain that it would impact the extra dings you and Mathjack mentioned, but that's also good to keep in mind.






So, getting back to avoiding a wash sale... after reading all of your replies, I read several Kitces articles and one from Investopedia, and it sounds like we could choose a fund at the same brokerage with different benchmarks and different managers even though the top holdings are the same and we'd be OK? Specifically, the 'loser' is a Growth Fund and the other one we like is a Growth Index Fund that will be paying DIV in just a few weeks. Or are those too similar?

Is there a reason you can’t just tell us the names or tickers of the funds so we can give you our opinion if it might be a wash sale?

This might help:

https://youtu.be/WurAjtgB4gk

 

[always_learning]

I hit the 20% cap gains bracket as the result of a RE transaction so with RE being as it is, you might hit that number because it’s the total of all your cap gains, not just one singular investment. You never know,

Ah, yes, that'll do it. Excellent reminder for me to consider RE as well as more liquid investments.

Is there a reason you can’t just tell us the names or tickers of the funds so we can give you our opinion if it might be a wash sale?

This might help:

https://youtu.be/WurAjtgB4gk

The link actually did help, thanks! He has a neat channel and I've already watched a few of his videos.

No problem giving the fund names... i just didn't want to muddy the waters if me typing the similarities/descriptions would suffice. Based on the explanation in the video I'm pretty sure the funds I described are too similar, so we'll reassess.

Both are at Vanguard:

Thinking of leaving VWUAX

Was looking at VIGAX