Tax Loss Harvest - when is it "too much?"

[Grep]

Tax Loss Harvest - when is it "too much?" plus allocation questions.

Hello forum members,

It's possible for me to *short term* tax-loss harvest well into six figures at the moment (sickeningly well!). But how much is too much?

1) Am I correct that there is no advantage to TLH except for the tax-related issues? That is, there are no other gains in efficiency, etc? So, for example, no one would "TLH" in a tax-deferred account for any reason.

2) As a general rule, how does one decide when enough is enough? I can't possibly live long enough to benefit from that much TLH against normal income at $3k per year, and each year it's worth less anyway. I can easily see attempting to match expected or realized short term gains with losses, or expected near-term long term gains, for example. What other obvious considerations are there?

3) If I remain unsure, I can put off much of this potential TLH until next year. But the advice seems to be to TLH "early and often," especially when markets are down. Am I correct that, if one is going to TLH at all, one should *always* take short term TLH (e.g., so that one may offset it against short term gains first). When does one take a "wait and see" approach in case a loss recovers?

4) What sort of down-side risks are there to very large TLH's given the uncertainties of longer time frames? For example, let's say the IRS decides that losses may no longer be carried-forward, or ST/LT capital gains are taxed at higher rates?

So, how much is enough, and how much, if any, is too much?

Thank you!

 

[kaneohe]

The only risks that I am aware of :
1) I read somewhere that if you die, the TLH cannot be carried over to the heirs. Not sure if that is real and if it is, how it works w/ a jt acct w/ spouse but you might want to check that out. Might not matter tho if they will inherit w/ stepped up basis.
2) If you were going to sell in a yr or so and somehow knew that tax rates were going to increase........if you sell now, you lower the tax basis for the replacement shares and end up with a larger gain at higher tax rates in the future which would negate and more any gains today.

In your item 3---you talk about a short term TLH. I am not sure why you are being so specific. Seems to me that even a long term TLH would be just as useful in offsetting ST gains.

My bias is to take what you can now before it disappears and if the markets keep going down, you can do more TLH. If you generally get CG distributions in a normal yr, the TLH may vanish quicker than you think since the carryover losses go against both the CG and also the extra 3K against ordinary income.

edit: I asssume you are going to exchange into a similar equity position to maintain your AA and not just going to cash. And yes if IRS was going to eliminate the carryover, I'd worry about it but I haven't heard any noise about that happening.

One of the nice features of having a large carryover loss is that it can make subsequent tax yrs much more predictable. Normally I have no idea what kind of CG distributions are going to be declared from the funds esp. in December. With a large carryover, you know that entry on the 1040 is going to be -3K until you get close to running out.

 

[clifp]

I think once you have harvested enough losses to eliminate all of your gains plus the 3,000 which can be applied against regular income, I don't see much point in taking more.

After that point, I think selling should be based almost entirely on the fundamental value of the securities you hold and your view market. If you think the stock is going to drop, or you think another or stock or fund is even more undervalued, then sell other wise hold.

 

[Grep]

Kaneohe,

I think the point about short term capital losses being more valuable than long term ones for tax purposes is that short term losses are applied to short term gains (which cost more, tax-wise) first. You can only offset short term gains with long term losses after long-term gains have already been offset (potentially leaving little or none left to offset the more expensive short term gains).

I think this point is substantially moot if the losses are large enough that many year's worth of both short and long term gains can be offset.

If I'm wrong on any of the above, please correct me.

Thank you.

 

[FUEGO]

Just remember that the shares you buy today, at say $100 a share, might be worth $2500 a share in 30 years (or essentially all capital gains upon sale). So whatever shares you are selling to produce income, you will have capital gains on almost the entire sales price.

I don't see a reason to stop short on tax loss harvesting, as long as it can be implemented with minimal risk and minimal expense. Heirs receive stepped up basis regardless of your underlying basis, so it seems to be a win-win situation.

 

[LOL!]

I don't think any number is "too much". I had 6-figure loss from 2000-2002 that got carried over and eventually used up by 2007.

When I retire, I will be using my taxable holdings to pay my expenses. Thus anything that I sell with a capital gain will have the cap gain offset by my carryover losses. My actual income will then be zero. With zero income despite paying for my expenses, I can then convert my traditional IRA money to a Roth IRA while in a 0% or other low tax bracket.

So it's not just about what you do this year or next year. It's about the future.

 

[Peter]

Also, unless I've missed something in the IRS documents, you can use long term losses to offset capital gain on the sale of your house, should that be greater than $250k (or $500k for a couple).

Peter

 

[Grep]

Thank you for the comments.

If I sell for TLH purposes, it may a good time to reassess my over-all allocation. My major holdings (taxable) are VTSAX (Vanguard total stock market), VFWIX (FTSE all-world ex-US), VIVAX (large cap value) and VBR (small cap value).

For VTSAX, probably the best alternative would be a combination of VFINX (S&P 500) and VEXMX (Extended market - essentially everything except S&P 500). I recall it said that about an 80-20 split is a decent match to the total market, but that may have changed recently. VLACX (large cap) probably tracks VTSAX well enough to serve, too. Either way, I'd switch back to VTSAX.

For VFWIX, I suppose that VGTSX (Total International) is an obvious choice. Anything better? I'd probably also switch back, but perhaps I'd go with ETF's this time around.

For VIVAX, it's less clear what a good alternative would be. Maybe VHDYX or VUVLX? Any ideas? I'm not wedded to the idea of continuing to own VIVAX and could see selling it or reducing my exposure, e.g. for some split between Small Value and the Total Stock Market.

For VBR, there's no obvious alternative at Vanguard. Perhaps some other ETF?

Thanks for your comments.

 

[kaneohe]

Kaneohe,

I think the point about short term capital losses being more valuable than long term ones for tax purposes is that short term losses are applied to short term gains (which cost more, tax-wise) first. You can only offset short term gains with long term losses after long-term gains have already been offset (potentially leaving little or none left to offset the more expensive short term gains).

I think this point is substantially moot if the losses are large enough that many year's worth of both short and long term gains can be offset.

If I'm wrong on any of the above, please correct me.

Thank you.

Grep----I agree w/ everything you said esp. about the substantially moot point you made ........if you have significant short term gains this yr when the peak in market was about a yr ago, you must have a special talent that should be bottled and sold .

 

[Grep]

Kaneohe,

No, I'm afraid I'm not. I shouldn't be too hard on myself, but I doubt I'll be looking at gains for a number of years.

Cheers.

 

[NW-Bound]

2) As a general rule, how does one decide when enough is enough? I can't possibly live long enough to benefit from that much TLH against normal income at $3k per year, and each year it's worth less anyway.

I think once you have harvested enough losses to eliminate all of your gains plus the 3,000 which can be applied against regular income, I don't see much point in taking more.

I don't think any number is "too much". I had 6-figure loss from 2000-2002 that got carried over and eventually used up by 2007.

If you believe in "buy-and-hold" and do not trade much, then clifp's approach is right.

However, my experience has been more along the line of LOL, mostly due to my somewhat active investing style. After the tech crash in the early 2000s, I lost much money, though I owned not a single dot.com. Seeing that I could not count on my tech holdings to rebound to previous levels, I liquidated them and bought material and energy stocks. Same as LOL, I gradually sold as these stocks start to "mature". The "gain harvesting" selling was indeed easier to make, because I knew I did not have to pay taxes on the capital gains, still sitting on big losses of earlier years. When I used up the carried-over cap losses, I stopped selling. BIG MISTAKE!

A very old-timer investor (he's long dead, being born in 1899), Gerald Loeb, said never to let tax issues affect your buy/sell decisions. If you think it is going down, sell. Better to pay taxes on gain, than to sit sulking on losses. I knew but did not heed his advice.

Again, if you are not an active investor, then the above does not apply. I am not a day trader by the way. I have held many stocks for 3-5 years to ride an economic cycle. Over all, my portfolio yearly turnover is far less than most MFs, but perhaps more than the beloved Wellesley favored by many forum members.

 

[DblDoc]

I'd recommend reading this: Tax Loss Harvesting - Bogleheads

DD