### Author Topic: A formula for tax-loss harvesting?  (Read 342 times)

#### Dmaynard

• Posts: 5
##### A formula for tax-loss harvesting?
« on: December 28, 2018, 10:19:00 AM »
So I just learned about tax-loss harvesting (sadly too late to use it this year), but it got me thinking that there must be a formula to determine whether tax-loss harvesting (TLH) makes sense for a given individual. As far as I can tell the variables would be: the size of the loss; transaction costs of selling and buying investments; capital gains tax rate at year 0; capital gains tax rate at year X; number of years between TLH and eventual resell; anticipated growth in the investment between year 0 and year X; amount of capital gains to be offset in year 0; annual income in year 0; annual income in year X; average income tax rate in year 0; and average income tax rate in year X.

(Note: Formula would have to assume that losses are not being carried forward into year 1, and that the fund that you purchase to replace your initial fund shows the same growth rate over the long-term.)

This seems so straightforward that I'm surprised I can't find someone who's developed a formula to do this already. Am I missing something obvious that makes this impossible to calculate? Has another mustachian already cracked this and I just can't find it?

#### Indexer

• Handlebar Stache
• Posts: 1237
##### Re: A formula for tax-loss harvesting?
« Reply #1 on: December 28, 2018, 07:34:07 PM »
Does it need to be that complicated? I might be missing something, but it seems pretty simple.

1. You can carry forward losses into future years. Realize loss in year 0, use it to offset a gain in the current year, or in a future year.

2. Unless you make a stupid amount of money your long term gains are either taxed at 0% or 15%. You are more likely to be in the 0% bracket when you are FIRE than when you are working.

3. Transaction costs:  If you are trading Vanguard ETFs at Vanguard the transaction fees are \$0.

4. If you are using an appropriate surrogate investment the growth difference should be 0%.

Harvest losses in the working years when you are in the 15% or higher LTCG bracket. Use the losses to offset gains when you can.

Short of a change in tax laws, the only way I see to screw it up is if you harvest losses to offset gains in a year when you are in the 0% bracket and then you realize even more gains(thanks to the lower cost basis) in a year when you are in a higher bracket. Just avoid doing this. If you are in the 0% LTCG bracket consider harvesting gains instead of losses.

#### MDM

• Walrus Stache
• Posts: 8842
##### Re: A formula for tax-loss harvesting?
« Reply #2 on: December 28, 2018, 10:11:28 PM »
And if you have more losses than gains, those excess losses (up to \$3K) are subtracted from ordinary income, saving your ordinary income marginal rate.  If that rate is more than 15%, TLH is probably a "go do" and not worth analyzing more.

#### MustacheAndaHalf

• Handlebar Stache
• Posts: 1411
##### Re: A formula for tax-loss harvesting?
« Reply #3 on: December 29, 2018, 02:39:41 AM »
3. Transaction costs:  If you are trading Vanguard ETFs at Vanguard the transaction fees are \$0.
Fixed!  Actually since August 2018, Vanguard charges \$0/trade for ~1800 ETFs, including iShares, SPDR, Schwab, ...
Your original statement is still correct, but I like to get the word out whenever it comes up.  It's especially relevant to tax loss harvesting, since you can switch out of Vanguard ETFs and into Schwab/iShares.

Back to OP's assumption that it's too late.. why?  Monday is the last trading day of the year, and anything you sell on that day applies to your 2018 tax bill.  If you have something at a taxable loss, you can sell and realize that loss.

Without transaction fees, I don't see the downside in tax loss harvesting.  The IRS subtracts money from what you owe on taxes, and you keep that money invested.  Rather like an interest free loan for as long as you like.
« Last Edit: December 29, 2018, 02:42:23 AM by MustacheAndaHalf »

#### Dmaynard

• Posts: 5
##### Re: A formula for tax-loss harvesting?
« Reply #4 on: December 31, 2018, 09:50:52 AM »
Thanks for the great replies all. I guess TLH almost always make sense. I'm trying to better understand what the actual dollar benefit is though, since this website: (https://www.kitces.com/blog/evaluating-the-tax-deferral-and-tax-bracket-arbitrage-benefits-of-tax-loss-harvesting/) highlighted the fact that the benefits are significantly smaller than the anticipated Tax-alpha savings.