tax loss harvesting

[ripper1]

Hello, all. I have always only had tax deferred accounts. Recently I set up a taxable account at Vanguard. Talk about bad timing. Anyway I was planning on using this vehicle for some of my income. I was going to just draw the dividends from VBTLX. My stock portion which is made up of VTSAX and VGTSX have substantial losses. Does it make sense for me to sell VTSAX and buy maybe a similiar fund like VFINX and then by following the rules buy back VTSAX after 31 days. I currently have a 5000 dollar loss in VTSAX. When would I do this. Now or wait till the end of the year. My original investment was 100,000. I started with 35% in VTSAX, 15% in VGTSX and 50% in VBTLX. How would this affect my cost basis. Just wanted hear some thoughts from this intelligent community before I call Vanguard in the morning.

 

[DblDoc]

Good resource here: Tax Loss Harvesting - Bogleheads

Why VBTLX in a taxable account? It is not very tax efficient http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

DD

 

[Animorph]

Ideally you wait until VTSAX hits its low, then sell it and buy your VFINX simultaneously. That gives you the maximum tax benefit. You normally don't see the money until you file your tax return with the tax loss, but you could adjust your withholding or estimated tax payment if applicable. So end of year is popular, but not necessary. Your tax basis behaves normally as long as you avoid the wash sale, so after buying back your VTSAX shares they will probably have a lower tax basis than before and you will owe your current tax savings back to the IRS when you ultimately sell the shares. But you get to use that money until then.

You might consider the impact of rising tax rates. Saving 15% capital gains now and paying 25% in a couple of years would not be good. Kind of a crap shoot for now.

 

[kaneohe]

You may also may want to look at the bigger picture.........
If you take the 5K loss now and end up the year w/ no other capital gains, then you get to use 3K of that loss this year against ordinary income and thus save at your marginal tax bracket rate applied to that loss.

If, though, you had a 5K LTCG distribution and would have been in the 15% bracket with that distribution, the 5K loss gets you nothing since the LTCG would have been taxed at 0% anyway. The only thing you get for the 5K loss is a lower basis which would result in higher CG taxes in the future.

......so you need to consider what other CG you will have this year (if any) what tax bracket you are in, etc.

As far as timing, if you take a loss now and it gets bigger, you can always sell again to capture more loss. If you wait, the loss may lessen or disappear.

 

[jebmke]

You may also may want to look at the bigger picture.........
If you take the 5K loss now and end up the year w/ no other capital gains, then you get to use 3K of that loss this year against ordinary income and thus save at your marginal tax bracket rate applied to that loss.

If, though, you had a 5K LTCG distribution and would have been in the 15% bracket with that distribution, the 5K loss gets you nothing since the LTCG would have been taxed at 0% anyway. The only thing you get for the 5K loss is a lower basis which would result in higher CG taxes in the future.

......so you need to consider what other CG you will have this year (if any) what tax bracket you are in, etc.

As far as timing, if you take a loss now and it gets bigger, you can always sell again to capture more loss. If you wait, the loss may lessen or disappear.

This problem can be avoided by holding index funds or tax-managed funds that do not generate gain distributions.

 

[clifp]

This problem can be avoided by holding index funds or tax-managed funds that do not generate gain distributions.

All of the funds the OP mentioned are in fact index funds (total stock and total international). By selling now and reinvesting in similar funds he can save roughly $1,000 in taxes (depending on brakets) etc.

I think roughly 80% VFAIX and 20% VFX extended market is very close substitute for VTSAX. The international is bit tricker but Vanguard Europe, Pacific, and emerging market would a reasonable substitute. Although personally I'd skip Europe given all of its troubles.

 

[jebmke]

Right, I meant the problem cited about capital gain distributions - that shouldn't come up with the index funds so doesn't detract from doing the TLH.

T