Author Topic: Tax Loss Harvesting and Dividends  (Read 2927 times)

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  • Bristles
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Tax Loss Harvesting and Dividends
« on: April 12, 2016, 11:12:28 AM »
I read the sticky above and found the TLH article on Madfientist.

Its still really unclear to me though. I understand the basics of TLH and the wash sale rule, but how does automatic reinvestment of dividends factor into your ability to TLH?  Is it because at the end of the year, you automatically buy back in with dividends and cap gains, when you really just want to sell off, and buy something else?

Can anyone explain in clearer terms?

Thanks.

seattlecyclone

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Re: Tax Loss Harvesting and Dividends
« Reply #1 on: April 12, 2016, 11:20:35 AM »
An automatic dividend reinvestment counts as a purchase. So if you want to harvest losses, the fact that you will have an automatic dividend reinvestment within 30 days (before or after) can trigger a wash sale.

An added wrinkle is that purchases within a retirement account can also trigger a wash sale. For example, if you have some VTSAX in both your taxable account and your IRA, and you reinvest dividends in your IRA to buy 5 shares, you completely lose the tax benefit from the first 5 shares you sell for a loss in your taxable account within 30 days.

For this reason I avoid automatic dividend reinvestment in my retirement accounts for funds that I also own in a taxable account.

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Re: Tax Loss Harvesting and Dividends
« Reply #2 on: April 12, 2016, 11:33:45 AM »
Oh interesting. I was starting to think it was just proportional, and therefore the wash sale would only trigger on the reinvested shares, thereby still allowing you to TLH on anything you sold off minus the automatic reinvestment. But now that you point out I have to pay attention to my holdings in my IRA, that further complicates it.

I assume that is a challenge for a lot of us that seem to invest in the same funds in both taxable and IRA accounts. 

Since you are a pro at this, how complicated is paying attention to this correctly?  Is the juice worth the squeeze? 

seattlecyclone

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Re: Tax Loss Harvesting and Dividends
« Reply #3 on: April 12, 2016, 11:44:04 AM »
Oh interesting. I was starting to think it was just proportional, and therefore the wash sale would only trigger on the reinvested shares, thereby still allowing you to TLH on anything you sold off minus the automatic reinvestment.

This is true within a taxable account. If you reinvested dividends to buy 20 shares and then sell 100 different shares for a loss, you still get to claim the full loss for 80 of those shares. You then add the disallowed loss on the other 20 shares you sold to your basis for the 20 dividend reinvestment shares, which allows you to get the benefit of that loss when you eventually sell those other 20 shares.

If those 20 reinvested shares are in your IRA instead of a taxable account, there is no basis to adjust; you simply lose out on the benefit of harvesting losses on the first 20 shares you sold in your taxable account.

Quote
Since you are a pro at this, how complicated is paying attention to this correctly?  Is the juice worth the squeeze? 

Harvesting losses can definitely be worthwhile. It offsets any capital gains first, and then up to $3,000 of the remainder can be used to lower your tax at your regular marginal rate. Anything left after the $3,000 limit carries over to the next year.

It doesn't need to be that complicated. At a minimum you should turn off automatic dividend reinvestment in your retirement accounts for any fund that you also own in your taxable account. Take a look at whether there are any loss harvesting opportunities before you go ahead and manually reinvest that money.

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Re: Tax Loss Harvesting and Dividends
« Reply #4 on: April 12, 2016, 11:57:54 AM »
Super helpful. Thank you.  This is clearly a sport.