Author Topic: Tax Loss Harvesting from VTSAX to VFIAX & VEXAX?  (Read 2623 times)

Mr. Green

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Tax Loss Harvesting from VTSAX to VFIAX & VEXAX?
« on: February 05, 2018, 02:27:18 PM »
Due to a recent property sale, I put $100,000 into VTSAX in my taxable account over the last week. Thanks to the recent drop in prices, I have the opportunity to tax loss harvest several thousand dollars. I changed my taxable account to SpecID just a month ago so I would have options like this. I want to make an exchange so the money isn't out of the market at any point and was considering an exchange into 80% VFIAX/20% VEXAX, based on this Bogleheads page that gives Total Stock Market approximations made up of other funds.
https://www.bogleheads.org/wiki/Approximating_total_stock_market

I understand that the details on swapping "like" funds are nice and cloudy since there's no clarification from the IRS. I've read some previous threads from back in 2015 on the forum re: tax loss harvesting in general and it seems like this would be an okay swap, given the lack of clarity. The biggest argument against would be VFINX's weight of large caps being similar to the weight of large caps in the total market fund, but the fund make ups are still fairly different based on the number of holdings in each. I suppose the worst case scenario in an audit is I can't claim the losses. If I didn't make the swap I couldn't have taken losses in the first place so I'm not really losing anything there.

Has anyone performed any tax loss harvesting? How did you make out? I know the run up over the last couple years hasn't really provided much opportunity for this.
« Last Edit: February 05, 2018, 02:43:09 PM by Mr. Green »

Arbitrage

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Re: Tax Loss Harvesting from VTSAX to VFIAX & VEXAX?
« Reply #1 on: February 05, 2018, 02:52:21 PM »
Swapping VTSAX for VFIAX is perfectly fine and doesn't run afoul of the 'substantially identical' guidance by any reasonable measure.  If you want to buy extended market as well, that's fine. 

You would just need to be careful to ensure that you don't buy any Vanguard TSM in any of your accounts over the next 30 days to avoid triggering the wash sale rules.  That includes reinvested dividends or automatic investments in any of your accounts, including your retirement accounts. 

Mr. Green

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Re: Tax Loss Harvesting from VTSAX to VFIAX & VEXAX?
« Reply #2 on: February 05, 2018, 03:44:34 PM »
I don't think there will be any issues with buying TSM in the next 30 days. Dividends are only thrown off quarterly and if I do the exchange tomorrow I'll early the 30 days in early March. This does bring up a good point though that I should change my investment settings to pay out dividends an capital gains in cash rather than reinvest.

Mr. Green

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Re: Tax Loss Harvesting from VTSAX to VFIAX & VEXAX?
« Reply #3 on: February 05, 2018, 05:18:55 PM »
A tangentially related question....

Now that VTSAX has updated the price, I see that I have about $6,000 in losses from my buys over the last week. I have other buys from within the past year that total $4,500 in gains. Would I be better served to sell all the shares of VTSAX that show capital gains within the last year to cancel out as much of the loss as possible or just take the loss and potentially carry over any losses over $3,000 into the next year? Perhaps it doesn't really matter.

I'm FIRE, wife is still working, but we only expect our AGI to put us in the 10% tax bracket for 2018. I don't expect our income to rise in future years. If anything it will get lower as my wife stops working and we keep our income low for ACA purposes.

Indexer

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Re: Tax Loss Harvesting from VTSAX to VFIAX & VEXAX?
« Reply #4 on: February 05, 2018, 05:55:16 PM »
Swapping VTSAX for VFIAX is perfectly fine and doesn't run afoul of the 'substantially identical' guidance by any reasonable measure.  If you want to buy extended market as well, that's fine. 

Until the IRS defines substantially identical I wouldn't make assumptions. Using a bunch of smaller index funds to copy a larger index in it's exact proportions seems pretty substantially identical to me. VEXAX is designed to be combined with VFIAX to create the same holding as VTSAX. The IRS has never enforced it that way, but if they decided to I wouldn't want to have to explain the transactions to an auditor.

If the split is 80/20 VFIAX/VEXAX, then go slightly different. Maybe 100% VFIAX, or 80/20 VFIAX/VIMAX. It's a very similar allocation with very similar returns, but it's a completely different number of stocks and no small caps. Plus, you wouldn't be holding it forever.

Clean Shaven

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Re: Tax Loss Harvesting from VTSAX to VFIAX & VEXAX?
« Reply #5 on: February 05, 2018, 06:00:40 PM »
Personally, I wouldn't sweat trying to match the holdings of VTSAX in anything else, if you are TLH-ing for only 1 month, and then will swap it back. 

The last time I TLH'd (several years now), I used VLCAX as the destination.  IIRC, I sold VTSAX and/or VFIAX.  Close enough to more-or-less cover the US market that I wanted to remain in, but definitely not "substantially identical" for IRS purposes.

the_grillman

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Re: Tax Loss Harvesting from VTSAX to VFIAX & VEXAX?
« Reply #6 on: February 05, 2018, 06:26:01 PM »
As a tag along question (I also have a loss in VTSAX) I started wondering about with regards to Tax Loss Harvesting and it's usefulness.  Aren't you just decreasing the cost basis of your shares, meaning that when you eventually sell, you have higher capital gains/taxes?  If yes, then is there really a benefit?

Indexer

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Re: Tax Loss Harvesting from VTSAX to VFIAX & VEXAX?
« Reply #7 on: February 05, 2018, 08:35:01 PM »
As a tag along question (I also have a loss in VTSAX) I started wondering about with regards to Tax Loss Harvesting and it's usefulness.  Aren't you just decreasing the cost basis of your shares, meaning that when you eventually sell, you have higher capital gains/taxes?  If yes, then is there really a benefit?

Yes, it does decrease your cost basis. The benefit is that you can earn interest on the extra money in the meantime.

Clean Shaven

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Re: Tax Loss Harvesting from VTSAX to VFIAX & VEXAX?
« Reply #8 on: February 06, 2018, 07:29:18 AM »
As a tag along question (I also have a loss in VTSAX) I started wondering about with regards to Tax Loss Harvesting and it's usefulness.  Aren't you just decreasing the cost basis of your shares, meaning that when you eventually sell, you have higher capital gains/taxes?  If yes, then is there really a benefit?

Yes, it does decrease your cost basis. The benefit is that you can earn interest on the extra money in the meantime.
To add to this: for the eventual future sale, after "creating" a lower cost basis, my projection is that sale will be a long term capital gain, and it will be at a time when my income is very low, therefore will be taxed at a low or zero rate. (Under current tax laws, which obviously are subject to change.)

Tax loss harvesting is the one little bit of market timing like behavior that I allow myself. So today, or maybe tomorrow or the next day, I'll try to capture some losses during this market blip.