How to tax loss harvest?

[Left]

I'm trying to learn how to do this when I only own 1 stock.

I own VTI, and I plan was to rotate it between SCHB and ITOT when the market went down to harvest a loss. But then I decided that the time between loses would net me enough profits at short term rate that it made this kind of pointless

so how do people tax loss harvest when their fund doesn't go down enough to balance out the short term gain tax? In the past, I sold off other funds I had, but now that I'm left with only 1 fund, I can't figure out how to make this work

[MustacheAndaHalf]

so how do people tax loss harvest when their fund doesn't go down enough to balance out the short term gain tax?

Either I don't understand, or there's a flaw in this thinking.  As long as you have a gain, you can't get a taxable loss by selling.  When you have a capital loss, selling lets you grab that loss assuming you held the asset 31 days or more (the IRS "wash sale" rule).  When you file taxes, you get a 1099-B listing the loss.

When you have one fund at a loss and one fund at a gain, you don't sell both.  You just sell the one with the loss.  Because you don't want money to be idle, you might buy into another fund.  And then because of wash sale rules, you can't buy back for 31 days.

[Systems101]

I decided that the time between loses would net me enough profits at short term rate that it made this kind of pointless

I suspect the losses / time frames you are looking at are too small for you to effectively harvest as a non-robot.  What loss percentage are you looking at, 3%? 10%? 20%?  What is the absolute dollar amount?

Personally, if it's under $1K in loss it really isn't worth it due to transaction costs (and yes, there are costs beyond the trading commission).  The smallest one I've bothered to capture was about $2300.  If it's under 5% or so of loss, then I agree, there is risk of things moving quickly enough that you may have to stay in the "alternate fund". 

If you move from A to B, you eventually need to decide if you sell B and rebuy A or leave it in B.  How big the short term gain is will matter, so any funds/ETFs you rotate through you will want to have as things you are willing to keep.

IMHO, look for a 10%+ pullback to harvest.  Could be less if you have significant $ volume, but it needs to be $thousands to make it worth it.  Otherwise, there is too much conversion churn in trading expenses and risk of the market moving while you are doing the transaction.  (If you move 200 shares and you lose 5c/share between the spread and things moving in the few ticks it can take to do the sell/buy, you've lost $10 in the transaction even before any trading fees... do that both in and out of an ETF and pay $5 for each trade, and you're risking $30... so if you didn't capture on the magnitude of $3K in losses, the trading overhead will eventually sink your returns more than any financial advisor would).

The last time I did loss harvesting was late 2015/early 2016 (specifically 9/24/15 and 1/18/16).  I was "lucky" enough that my interim funds captured a pretty big short term loss (a good 3 to 8% - ouch), so I didn't have to leave funds "elsewhere".  Previous time was late 2008/2009 (There was likely a good opportunity in August/September 2011, but for various not-important reasons that didn't work out for me)

I'm in no rush to find more capital losses, though I will take them if they are significant enough.  As it is, from the loss captured last year, my line 16 of Schedule D is negative 5 digits.  I have remaining capital losses for YEARS of future taxes.

EDIT: Converted to a generic "Fund A and Fund B" to avoid specific funds in the example.  Bender, below, brings up a good point and I don't want to make any implications on what is/is not valid.

[slowsynapse]

Are VTI and SCHB too similar to use for this purpose?  It seems they are about 99% the same thing, would moving from one to another trigger a wash sale?

I agree that these funds are too substantially similar to Merritt the risk of using them in tax loss selling.  While it may not be likely for the IRS to pursue, it would be a difficult position to defend under audit.

[seattlecyclone]

Are VTI and SCHB too similar to use for this purpose?  It seems they are about 99% the same thing, would moving from one to another trigger a wash sale?

I agree that these funds are too substantially similar to Merritt the risk of using them in tax loss selling.  While it may not be likely for the IRS to pursue, it would be a difficult position to defend under audit.

Betterment wrote a whitepaper about how they will routinely switch their clients from VTI to SCHB (or vice versa) when doing tax-loss harvesting. They are clearly operating under the assumption that the IRS does not consider these two securities to be "substantially identical." I personally feel relatively safe following their lead.

[Left]

bogleheads listed schb as different enough, tracks different index

i guess i will wait for a large drop, i was thinking maybe every $1000-2000 in drop to switch funds, but it didnt make sense math wise

id be moving in the $100ks range if i switched funds, too much gain in them over the past decade. im thinking unless it is a 30-40% drop, it may not be worth it

i was lucky in that i got sold on vti early post college and right after 2009, i rode it all the way until now without really knowing how to be tax efficient, everything went into it, taxable/ira/401k

figured its time to learn more now that i turned 30

[seattlecyclone]

It seems that you may be unclear about what tax-loss harvesting is exactly. If the stock is up 50% since you bought it, a 10% drop in the market does not give you an opportunity to harvest losses. The current price must be below your purchase price for tax-loss harvesting to be a thing you can do.

[Left]

yes, i think my problem was my understanding of it, i was trying to capture drops in the market by moving between the funds during the drop

oh well, a net positive portfolio is better than chasing losses, i will give up on this and enjoy the ride as i have been