Tax Loss Harvesting

[Driko]

I have a vanguard brokerage account with both VTI and VOO. I understand the concept of tax loss harvesting, but I am not sure on how to execute it. When reading about it I see that wash out rules could possibly make it difficult. From what I read my understanding is that if I sell VOO at a loss I have to wait 30 days before purchasing VTI because it has similar holdings? It seems that with a 30 day waiting period that it would make it difficult to sell at a low lock in the loss and then buy something to keep your positions similar. Could someone explain the process possibly in more detail?

[PhysicianOnFIRE]

Total Stock Market and S&P 500 are far from identical. You will have no issues exchanging from one to the other for TLH purposes.  The wash sale rule is for substantially identical (exactly identical) funds. I wouldn't switch from a Vanguard S&P 500 fund to a Fidelity S&P 500 fund, but what you're proposing will be just fine.

Don't sell one and buy the other. Make an exchange. You don't want money on the sidelines. A lot can happen in a day and potentially wipe out any benefit from the TLH.

Happy TLHing!
-PoF

[Driko]

I am not familiar with an exchange. How does one go about doing that? I always thought you would sell and then immediately buy the other position. That's good to know that I can use both VTI and VOO!

[johnny847]

Total Stock Market and S&P 500 are far from identical. You will have no issues exchanging from one to the other for TLH purposes.  The wash sale rule is for substantially identical (exactly identical) funds. I wouldn't switch from a Vanguard S&P 500 fund to a Fidelity S&P 500 fund, but what you're proposing will be just fine.

Don't sell one and buy the other. Make an exchange. You don't want money on the sidelines. A lot can happen in a day and potentially wipe out any benefit from the TLH.

Happy TLHing!
-PoF

The law says substantially identical. It never says exactly identical. The IRS has never opined on what substantially identical actually means.
VTSAX and VTSMX are two share classes of the same fund. They're not exactly identical, but you'd have an hard time arguing they're not substantially identical.

Many people take the position that two funds tracking the same index are substantially identical. I agree with them.


As for exchanges they're not possible for ETFs. Only mutual funds.

[Driko]

So what do most people use for VOO so as not to cause a wash out? Also, would it be better to just sell the ETFs and buy the mutual funds for the purposes of tax loss harvesting?

[PhysicianOnFIRE]

I am not familiar with an exchange. How does one go about doing that? I always thought you would sell and then immediately buy the other position. That's good to know that I can use both VTI and VOO!

You can definitely use both. I TLH from one to the other in mutual fund form routinely. (VTSAX, VFIAX).  With mutual funds, you get the end of the day price without the bid/ask spread that exists with the ETF.

[johnny847]

I am not familiar with an exchange. How does one go about doing that? I always thought you would sell and then immediately buy the other position. That's good to know that I can use both VTI and VOO!

You can definitely use both. I TLH from one to the other in mutual fund form routinely. (VTSAX, VFIAX). I would guess the "exchange" option exists for ETFs as it does mutual funds, but I could be wrong. With mutual funds, you get the end of the day price without the bid/ask spread that exists with the ETF.

Let me repeat myself: Exchanges are not possible with ETFs.

[MustacheAndaHalf]

You want to have an answer for "what's the difference between these two funds" if the IRS asks.  VTI holds ~3600 stocks where VOO holds ~500.  Unless you're looking at more than 98% overlap in assets, I don't think it's a concern.

I view it as two conditions:
1. share price is below purchase price (taxable loss)
2. avoid doing a buy and a sell of the same asset within 30 days of one another

So you need to look at your transaction history for VTI and VOO.  If you want to realize a loss from VOO, check for purchases in the past 30 days.. and stop if you have any.  Then for VTI, did you sell it in the past 30 days?  If so, you can't move money from VOO to VTI without the wash sale problem.

And then you sell VOO, which generates a "pending credit" in your Vanguard account.  When the transaction clears in 3 days, it settles and you get the money.  But Vanguard lets you take that "pending credit" and buy shares, like VTI.  So you can use up the pending credit and purchase VTI with it.

Then you need a warning for those two holdings: you can't buy VOO for 30 days, and you can't sell VTI for 30 days.  You can't reverse what you did for 30 days.

Note if you automatically reinvest dividends, that's two events for the IRS.  The fund paid you qualified dividends... and you used the money to buy shares.  If that "automatic" action triggers in the same account you sold shares, your "automatic reinvestment" triggers a wash sale.  So you might want to avoid doing it right now, near the end of June, if you have automatic reinvestment setup for VOO (for this example of selling VOO to buy VTI).

[Driko]

You want to have an answer for "what's the difference between these two funds" if the IRS asks.  VTI holds ~3600 stocks where VOO holds ~500.  Unless you're looking at more than 98% overlap in assets, I don't think it's a concern.

I view it as two conditions:
1. share price is below purchase price (taxable loss)
2. avoid doing a buy and a sell of the same asset within 30 days of one another

So you need to look at your transaction history for VTI and VOO.  If you want to realize a loss from VOO, check for purchases in the past 30 days.. and stop if you have any.  Then for VTI, did you sell it in the past 30 days?  If so, you can't move money from VOO to VTI without the wash sale problem.

And then you sell VOO, which generates a "pending credit" in your Vanguard account.  When the transaction clears in 3 days, it settles and you get the money.  But Vanguard lets you take that "pending credit" and buy shares, like VTI.  So you can use up the pending credit and purchase VTI with it.

Then you need a warning for those two holdings: you can't buy VOO for 30 days, and you can't sell VTI for 30 days.  You can't reverse what you did for 30 days.

Note if you automatically reinvest dividends, that's two events for the IRS.  The fund paid you qualified dividends... and you used the money to buy shares.  If that "automatic" action triggers in the same account you sold shares, your "automatic reinvestment" triggers a wash sale.  So you might want to avoid doing it right now, near the end of June, if you have automatic reinvestment setup for VOO (for this example of selling VOO to buy VTI).

Thanks, it seems like there is more involved than I previously thought. I guess this is why some people prefer the robo advisors for tax loss harvesting purposes.