Harvest Tax Loss by Fund Switch?

[charlie]

Hi All,

Currently my after tax money is invested in Wellington, FTSE all world ex US and Tax Managed Small Cap, all at Vanguard. The bulk of this money
was invested in mid September of this year. I am thinking about switching to the 5% Managed Payout Fund at Vanguard.

The stock/bond ratio won't change much and I could use the tax loss
to offset a large capital gain that will occur when I sell my laundromat
later this year.

I have been thinking about the Managed Payout Funds well before they
came out. These funds invest about 5% in "other" which is their name
for commodities, I think. The ratio of US to Foreign stock is a little
higher than I like, and I am "neutral" on the market neutral investment.
Otherwise, the risk level is pretty close to my current funds.

All in all, I like the idea of a monthly payout from an all-in-one fund that
rebalances itself. This is especially nice in a taxable account. Yes, I
know that the income is taxable, but the income is needed to offset
loss of income from the laundromat.

Finally the idea of a simple one fund does all appeals to me as I dodder
off into the sunset at age 74. As I have said before, my dear wife's eyes glaze over at the thought of managing money.

So, can I tax loss harvest by selling and reinvesting as described?

Is my thinking OK?

Cheers,

Charlie

 

[FIREd]

So, can I tax loss harvest by selling and reinvesting as described?

Yes you could. But should you?

Payout funds are quite new and it is a bit hard for me to really be excited about them given their very short history. Also, be aware that the amount paid out to you will change from year to year depending on the market. Since this fund has a short history, it is hard to predict how volatile the fund income will be. Finally, the amount paid to you can also include a return of principal so there is indeed no guarantee that the capital won't get exhausted even if the stated fund's objective is to avoid capital exhaustion. But if you are aware of all those caveats and still like the fund, then go ahead and give it a try!

 

[clifp]

If you are comfortable with managed payout funds, and I have no reason to think that Vanguards won't be at least respectable, I think it is a good idea.

IMO this year unless you are a short seller, a brilliant market timer, or were all cash until the last Friday, I think everyone should sell enough losers to make their capitals gains zero or at least pretty low. This especially true for people with a wide variety of mutual funds where it is easy to switch to similar but non identical funds.

 

[Grep]

Hitching a ride on this thread, I have a few questions about tax loss harvesting.

1) If I made any purchase in a given fund within the prior 30 days, then I cannot sell any part of that fund without at least a partial wash sale - correct? That is, the only way to completely avoid a wash sale is to not buy the same fund at all for 30 days either before or after the sale. Correct?

2) BUT, if I sell the entire fund, then it's not a wash if I bought some within 30 days prior to the sale. I presume that the prior purchases cannot be considered replacement shares since they are sold too (at the same time). Correct?

3) Unfortunately, I have to ask myself how much of a loss is too much to TLH? Is there ever any reason to not TLH to the max, even in the face of very large losses?

Thanks

 

[kaneohe]

Hitching a ride on this thread, I have a few questions about tax loss harvesting.

1) If I made any purchase in a given fund within the prior 30 days, then I cannot sell any part of that fund without at least a partial wash sale - correct? That is, the only way to completely avoid a wash sale is to not buy the same fund at all for 30 days either before or after the sale. Correct?

2) BUT, if I sell the entire fund, then it's not a wash if I bought some within 30 days prior to the sale. I presume that the prior purchases cannot be considered replacement shares since they are sold too (at the same time). Correct?



3) Unfortunately, I have to ask myself how much of a loss is too much to TLH? Is there ever any reason to not TLH to the max, even in the face of very large losses?

Thanks

Grep----

My impressions:
1) Correct, so if you are automatically reinvesting distributions,
you may want to turn off that feature temporarily and get them sent to you , or else redirected into a m.mkt. I wish
others, including IRS, would use the term that you used "partial wash sale" since that conveys the idea much better than "wash sale"
2)Again my impression is that you are correct.
3) I haven't found one yet. I have read that the TLH disappears if you die which might be a consideration....not sure what happens if jt. ownership. To me, it seems like being able to take the 3K excess loss annually against ordinary income (at perhaps higher rates) seems useful even if it takes a long time to use up. Also a nice feature is that it would make your income tax more predictable since you would know that your LTCG was going to be a 3K loss for a number of yrs esp if you get large/unpredictable CG distributions in Dec.

You might want to check out the mother of all TLH threads
(that's what it's called) at bogleheads.org. You can also ask the questions on fairmark.com. You might get confirmation or not of these answers.

Some other things to be aware of: if you are thinking of switching back after the TLH, are there any short term fees? When are the distributions for the exchange fund and are you "buying a taxable gain" in the new fund by buying late in the year(edit to add : might be lower in an index fund)? Is there a minimum investment in the exchange fund and do you meet it? If you are sending written instructions for a jt trust, do both need to sign? All new and wonderful things I have learned by stumbling into them.

 

[Lakedog]

Hitching a ride on this thread, I have a few questions about tax loss harvesting.

1) If I made any purchase in a given fund within the prior 30 days, then I cannot sell any part of that fund without at least a partial wash sale - correct? That is, the only way to completely avoid a wash sale is to not buy the same fund at all for 30 days either before or after the sale. Correct?

2) BUT, if I sell the entire fund, then it's not a wash if I bought some within 30 days prior to the sale. I presume that the prior purchases cannot be considered replacement shares since they are sold too (at the same time). Correct?

3) Unfortunately, I have to ask myself how much of a loss is too much to TLH? Is there ever any reason to not TLH to the max, even in the face of very large losses?

Thanks

1 and 2 are correct (as I understand wash sale rules). As to 3, I think booking losses for future use is the way to go. I have one ETF that I am going to replace with another in order to take the tax loss, most will be carryover losses to future tax years. It would be nice if the limit on capital losses were to increase (from $3,000) as McCain proposed but I don't believe Obama supports.

 

[charlie]

I read the threads on "managed payout funds" and took away the impression that most of you have a "wait and see" attitude. CFB, whose investment style is much like my own, disected them fairly well, IMO.

For what it is worth, I would like to offer a few observations myself.

I would expect these funds to perform much like Vanguard's other more
agressive balanced funds. Other than the market neutral component,
they invest in the same index funds used by Vanguard's "Target" funds but with a heavier tilt to foreign stocks. They invest about 5% in "other" which I suspect is mostly cash and or commodities.

As for the 10% in "market neutral", I don't expect any large upside or
downside based on the history of the mother fund. The market neutral
is bench marked against 3-month T-bills and has a 4.8% average gain
since 1998. Personally, I expect the market neutral component to return something like a money market on steroids.

As for "eating your seed corn" during the current depressed market, I would just reinvest the monthlly payout until I need the cash flow.

I really like my current mix of 4:1:1 of Wellington,Tax managed small cap and FTSE all world EX US and will probably stay with it. But the 5%
managed payout is tempting and I might stick my toe in after selling the laundry.

Cheers,

Charlie

 

[ziggy29]

Anyone else wondering if the market will tank again in December with a bunch of tax loss harvesting taking place?

 

[charlie]

I think the savvy investor will stay in the market .... just switch from one fund to another. The timid have mostly been flushed out already, IMO, and the rest will hang on or sell into rallies. There will be a lot more volatility as hedge funds unwind, but I truly think, hope and pray that we have seen the bottom. The big question is how long before the next bull market starts?

Cheers,

Charlie

 

[clifp]

Anyone else wondering if the market will tank again in December with a bunch of tax loss harvesting taking place?

Yes, I do think we will see some significant selling pressure from Thanksgiving on due to tax selling. I've haven't sold many of my losers, so I still have some positive capital gains. I'll certainly fix this by the end of the year, and I am actually looking at doing this in the next several weeks, rather trying to sell in market with others in the same situation. The good news is we should have a pretty good Jan effect. I am confident that I'm 50% accurate in this prediction.

 

[Texas Proud]

I just wish I could take my loss BACK to last year when I had a big capital gain on stocks and distributions...

As for harvesting... well, I got enough already for a few years... no harvesting needed now...

 

[Animorph]

Charlie, if you just bought these shares about a month ago I'm sure Vanguard will charge you 1%-2% redemption fees and may do other bad stuff to you. They hate short-term trades. Be sure to read the prospectuses for those funds to find out what the damage is.

You do have captial gains to cancel out with this right? You can only deduct $3k against normal income.

 

[charlie]

Animorph,

Thanks for the input. I did not know about the $3k limitation .... but that's what this forum is good for!

Cheers,

Charlie

 

[FIREd]

Animorph,

Thanks for the input. I did not know about the $3k limitation .... but that's what this forum is good for!

Cheers,

Charlie

Well, it is 3K per year and you can carryover your losses to next year.

For example, let's say you harvest $7000 in long term capital losses. Let's say this year you have $1000 in long term capital gains (like long term capital gain distributions which you may still have this year). You can use your losses against the $1000 in long term capital gains plus another $3000 against your regular income. You can then carry over the loss left ($3000) to use against next year's capital gains and income.

 

[charlie]

I looked up the rules for capital loss cary forward in US Pub 550. It appears to me that you can carry forward up to $3,000 per year against ordinary income with no time limit until the loss is used up.

It seems like a no brainer to switch into a similar risk investment even if it takes several years to recover the loss. This assumes of course that you have taxable income in the first place. You might even get lucky and have some capital gains to offset.

In fact, it looks like a use it or loose it situation to me. If I hold my current funds until they recover the opportunity will be lost. If I sell and buy similar risk funds then I have the option of selling a little each year
to rebalance as needed and/or offsetting current income.

In my case, I hope to pass the taxable account to my kids and let them reap the tax basis step up (God willing and the creeks don't rise). I prefer not to sell shares for living expenses but could do so "tax free" if needed until the loss cary forward is exhausted.

Please comment .... this tired old brain is getting fuzzier each year.

Cheers,

Charlie

 

[clifp]

I just started the process of fund switching today, it is actually trickier to execute than a thought because the markets are so volatile.

I sold my position in IVV (SP 500 ETF) and bought 2x the number of VTI. I put in a limit order to sell IVV slightly above the market and it got executed during a spike upward. Within a minute the price of VTI had gone up almost 1%. I stuck to my plan and put in my limit order for VTI, the market dipped again and it was excuted, but there was a rather agonizing hour when I thought oh crap I sold at the bottom.

I guess the advantage of regular mutual funds vs ETF is you place the switch order on the same day you don't have to worry about the crazy interday swings.

 

[Animorph]

Charlie,

That sounds like the way to go if you can get by without selling the replacements. In my case it would be delaying taxes on the investments I will be selling first in retirement when tax rates will probably be higher. Even so, I've already got enough losses to take my $3k deduction on income and carry some over to net year.

clifp, isn't that fun? Doing it with mutual funds is a bit of pig-in-the-poke since you have no idea what the prices are going to be. I repeated your scenario many times as I was getting out of a giant batch of company stock and into other stocks that were relatively cheap compared to mine. While annoying, 1% won't kill your long-term results, and it averages out if you exchange often enough.

 

[walkinwood]

Hitching a ride on this thread, I have a few questions about tax loss harvesting.

Be sure to read the fairmark site
The Wash Sale Rule

 

[charlie]

I have been thinking about the tax consequences of selling my laundry this year. This sale will be almost all long term capital gain. Can I offset
my fund losses this year which are almost all short term loss? Maybe one of you tax gurus can pontificate.

If I wait until early next year to sell the laundry, I think my AGI may be low enough that I would not owe any capital gains tax at all! That would be sweet indeed.

Back of the envelope calculations seem to say that I should switch funds
now to capture the loss and sell the laundry early next year.

But what I really should do is buy 2008 Turbo Tax and start playing what if games.

Cheers,

Charlie

 

[kaneohe]

Sounds like you probably already have last yrs Turbo Tax that you could do the what if on. If not, try this Tax Calculator - Tax Tools and Calculators - H&R Block

Probably would be good to capture fund losses now though not sure how much will be available to carryover for next yr since you possibly may have large capital gains distributions this yr if the funds were forced to sell for redemptions. Don't have much experience with business sales but my impression is that the sale ends up on Sch D (like the funds) possibly via Form 4797 so they would offset each other.

 

[FIREd]

Short term capital losses should first offset short term capital gains (step 1), then long term capital gains (step 2) and then regular income (step 3). Long term capital losses should first offset long term capital gains. When offsetting regular income, you must first use up all short term capital losses before can use long term capital losses.

Example: this year you have $7000 in short term capital losses and $500 in long term capital losses. Let's also assume you have $500 in short term capital gains and $2000 in long term capital gains.

Net short term capital gain/loss: $500 - $7000 = ($6500) short term capital loss (schedule D, section 1) - That's step 1.
Net long term capital gain/loss: $2000 - $500 = $1500 short term capital gain (schedule D, section 2)

Then you add the two: $1500 - $6500 = ($5000) capital loss. So in effect this year's net short term capital losses offset this year's net long term capital gains. That's step 2.

Then you can offset your regular income for this year by $3000 (that's step 3) and carryover $2000 worth of your capital losses to offset next's years capital gains and, if anything is left, next year's regular income.

Now, the carryover losses do remain categorized as short term and long term (you need to use the IRS worksheet to determine how much of the $2000 carryover are short term capital losses and how much are long term capital losses). Short term capital loss carryovers will first offset next year's short term capital gains and long term capital loss carryovers will first offset next year's long term capital gains.

Let's continue our example:
I will assume that the whole $2000 in carryover is categorized as short term capital loss as per the IRS worksheet. Let's assume that next year you have $500 in short term capital gains and $5000 in long term capital gains.

So next year:
Net short term capital gain/loss: $500 - $2000 (short term carryover loss) = ($1500) short term capital loss (schedule D, section 1)
Net long term capital gain/loss: $5000 - $0 (long term carryover loss) = $5000 short term capital gain (schedule D, section 2)

Then you add the two: $5000 - $1500 = $3,500 capital gain. So in effect this year's short term capital losses will offset next year's net long term capital gains. But remember this year's short term capital losses will first offset next year's short term capital gains, and only what's left of the carryover can then be used to offset next year's long term capital gains.

 

[clifp]

FIREDreamers example is correct AFAIK and quite detailed.

Conceptually the easiest way to think about this is you add up all the capital losses and gains, then figure out if it is short term or long term.

 

[kaneohe]

Example: this year you have $7000 in short term capital losses and $500 in long term capital losses. Let's also assume you have $500 in short term capital gains and $2000 in long term capital gains.

Net short term capital gain/loss: $500 - $7000 = ($6500) short term capital loss (schedule D, section 1) - That's step 1.
Net long term capital gain/loss: $2000 - $500 = $1500 short (LONG??)term capital gain (schedule D, section 2)


So next year:
Net short term capital gain/loss: $500 - $2000 (short term carryover loss) = ($1500) short term capital loss (schedule D, section 1)
Net long term capital gain/loss: $5000 - $0 (long term carryover loss) = $5000 short (LONG??)term capital gain (schedule D, section 2)

FD---I agree w/ clifp about your nicely detailed tutorial. A minor pt perhaps---should the last "short" in each of the phrases above be "long".
You do say "long" at the beginning of each sentence so someone would probably be ok but it might be a little confusing to others. Probably a cut and paste carryover

 

[FIREd]

Kaneohe,

you are quite right, I used copy and paste and forgot to change it.
Since I can't edit my original post, I will post it again here:


Short term capital losses should first offset short term capital gains (step 1), then long term capital gains (step 2) and then regular income (step 3). Long term capital losses should first offset long term capital gains. When offsetting regular income, you must first use up all short term capital losses before can use long term capital losses.

Example: this year you have $7000 in short term capital losses and $500 in long term capital losses. Let's also assume you have $500 in short term capital gains and $2000 in long term capital gains.

Net short term capital gain/loss: $500 - $7000 = ($6500) short term capital loss (schedule D, section 1) - That's step 1.
Net long term capital gain/loss: $2000 - $500 = $1500 [-]short[/-] long term capital gain (schedule D, section 2)

Then you add the two: $1500 - $6500 = ($5000) capital loss. So in effect this year's net short term capital losses offset this year's net long term capital gains. That's step 2.

Then you can offset your regular income for this year by $3000 (that's step 3) and carryover $2000 worth of your capital losses to offset next's years capital gains and, if anything is left, next year's regular income.

Now, the carryover losses do remain categorized as short term and long term (you need to use the IRS worksheet to determine how much of the $2000 carryover are short term capital losses and how much are long term capital losses). Short term capital loss carryovers will first offset next year's short term capital gains and long term capital loss carryovers will first offset next year's long term capital gains.

Let's continue our example:
I will assume that the whole $2000 in carryover is categorized as short term capital loss as per the IRS worksheet. Let's assume that next year you have $500 in short term capital gains and $5000 in long term capital gains.

So next year:
Net short term capital gain/loss: $500 - $2000 (short term carryover loss) = ($1500) short term capital loss (schedule D, section 1)
Net long term capital gain/loss: $5000 - $0 (long term carryover loss) = $5000 [-]short[/-] long term capital gain (schedule D, section 2)

Then you add the two: $5000 - $1500 = $3,500 capital gain. So in effect this year's short term capital losses will offset next year's net long term capital gains. But remember this year's short term capital losses will first offset next year's short term capital gains, and only what's left of the carryover can then be used to offset next year's long term capital gains.

 

[charlie]

Thanks to All for your inputs.

For better or worse, I traded in my taxable stock funds for the 5% Managed Payout fund yesterday and reaped $36,000 in short term loss. I decided to reinvest the monthly payout until I need the income or the capital return component drops to zero, whichever comes first. Fortunately, Lyn and I have enough cash reserves and recently inherited EE bonds to wait several years while the fund recovers (hopefully).

Cheers,

Charlie