Author Topic: Tax Loss Harvesting - Should you do it every opportunity?  (Read 3475 times)

Beach_Stache

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Tax Loss Harvesting - Should you do it every opportunity?
« on: February 14, 2016, 09:24:48 AM »
Hi,
I have a question about tax loss harvesting.  So this is the first year I've really read into it, and with the strong market the last few years the first time I would have the opportunity to use it.  So right now I had around $45k in FBIOX in Fidelity which is now down to around $30k, so around $15k loss in the last few months.  I had been thinking about moving money into FSTVX (Spartan 500 Index) for a while.  Even if I wanted to move back into FBIOX later in the year, is there any reason why I shouldn't sell the FBIOX today and buy FSTVX and be able harvest the losses?  If the FSTVX goes up w/the market or goes down, at least it's mimicking the market, and will eventually go up.  I've never done the tax loss harvesting so don't know if I'm seeing it right, and if Fidelity sends you all the forms at the end of the tax year or if I have to actually document anything?  Is there anything I'm missing here, and if I do have it right, is there any reason why if you have something else you would want to move money into (that's not an identical fund) why you wouldn't do this at any time when there is a dip in the market? 

terran

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Re: Tax Loss Harvesting - Should you do it every opportunity?
« Reply #1 on: February 14, 2016, 10:02:44 AM »
Sounds like a good plan.

As far as doing at EVERY opportunity, there's a good chance you'll run out of tax loss partners to switch to without triggering a tax loss. Something else I've noticed about Fidelity is that a number of there funds have short term redemption fees if you sell within 90 days of buying -- the spartan 500 index isn't one of them though.

RedmondStash

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Re: Tax Loss Harvesting - Should you do it every opportunity?
« Reply #2 on: February 14, 2016, 11:42:04 AM »
I've been wondering about this too. Spouse & I are planning to do a little TLH to move some money from non-retirement account to Roth IRAs (our SEP and 401k are already maxed out), for both 2015 and 2016.

But yeah, I've never done it before, and really just learned about it.

One thing I do know is that if you don't TLH, the cost basis (nontaxable part) of your investments goes up when you get dividend payouts. This means that you're paying bits of tax each year that you get dividends, and as a result, you won't pay as much tax when you finally sell those investments. (This assumes a constant capital gains tax rate, which may not apply depending on how much your income goes up or down in the year you sell investments.) When you TLH, you're basically resetting the cost basis downward, so you can end up paying higher taxes later. So that is one potential drawback to TLH.

Anyone know whether you have to track the info yourself when you TLH? Or does your bank/brokerage send you a statement with all the relevant info at tax time?

Thanks.

PhysicianOnFIRE

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Re: Tax Loss Harvesting - Should you do it every opportunity?
« Reply #3 on: February 14, 2016, 03:45:17 PM »
Hi,
I have a question about tax loss harvesting.  So this is the first year I've really read into it, and with the strong market the last few years the first time I would have the opportunity to use it.  So right now I had around $45k in FBIOX in Fidelity which is now down to around $30k, so around $15k loss in the last few months.  I had been thinking about moving money into FSTVX (Spartan 500 Index) for a while.  Even if I wanted to move back into FBIOX later in the year, is there any reason why I shouldn't sell the FBIOX today and buy FSTVX and be able harvest the losses?  If the FSTVX goes up w/the market or goes down, at least it's mimicking the market, and will eventually go up.  I've never done the tax loss harvesting so don't know if I'm seeing it right, and if Fidelity sends you all the forms at the end of the tax year or if I have to actually document anything?  Is there anything I'm missing here, and if I do have it right, is there any reason why if you have something else you would want to move money into (that's not an identical fund) why you wouldn't do this at any time when there is a dip in the market?

I'm not sure it's a good idea to move from a fund that is down 33% to one that is down 13%.  You're definitely locking in a sizable actual dollar loss.  If you want to tax loss harvest, sell FBIOX and buy a different biotechnology fund or something else that has been really beat up lately.  I think investing in an S&P 500 fund is a great idea.  I would put new money there, but I wouldn't exchange a big loser for it.  When the market rebounds, FBIOX will most likely rebound at a nice pace.  If you want out of the biotechnology sector, wait until you've at least gotten most of your original investment back.


PhysicianOnFIRE

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Re: Tax Loss Harvesting - Should you do it every opportunity?
« Reply #4 on: February 14, 2016, 03:51:23 PM »
I've been wondering about this too. Spouse & I are planning to do a little TLH to move some money from non-retirement account to Roth IRAs (our SEP and 401k are already maxed out), for both 2015 and 2016.

But yeah, I've never done it before, and really just learned about it.

One thing I do know is that if you don't TLH, the cost basis (nontaxable part) of your investments goes up when you get dividend payouts. This means that you're paying bits of tax each year that you get dividends, and as a result, you won't pay as much tax when you finally sell those investments. (This assumes a constant capital gains tax rate, which may not apply depending on how much your income goes up or down in the year you sell investments.) When you TLH, you're basically resetting the cost basis downward, so you can end up paying higher taxes later. So that is one potential drawback to TLH.

Anyone know whether you have to track the info yourself when you TLH? Or does your bank/brokerage send you a statement with all the relevant info at tax time?

Thanks.

Brokers have been required by law to track cost basis since about 2011.  It's not a bad idea to track on your own, but Vanguard does a good enough job for me.

If you plan to tax loss harvest, set your cost basis to Specific ID (as opposed to average cost, FIFO, LIFO, etc...)  Each fund purchase will reflect what you actually paid for it.  If you reinvest dividends, that is a purchase and the cost basis for that lot will be whatever the fund costs on the day you invested those dividends.

With This Herring

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Re: Tax Loss Harvesting - Should you do it every opportunity?
« Reply #5 on: February 14, 2016, 04:07:19 PM »
*snip*

Anyone know whether you have to track the info yourself when you TLH? Or does your bank/brokerage send you a statement with all the relevant info at tax time?

Thanks.

Your brokerage should include all info on your stock sales for the year on a 1099-B or combined 1099 (combined would be sales, interest [otherwise a 1099-INT], dividends [otherwise a 1099-DIV], and any other reportable items for that account).  The brokerage should include the purchase date, sale date, possible wash sale info (as far as brokerage knows), cost basis, selling price, and gain or loss for most sales.  For some sales, the brokerage might exclude the cost basis, depending on when you purchased the security and what type it is, but you should be able to find it on your year-end statement.

If your losses exceed your gains (please follow Schedule D instructions carefully), you get to take $3,000 excess loss each year against other income.  The rest gets carried over to next year.  You get to keep carrying forward those losses until they are used up, so keep a good record of them!

obstinate

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Re: Tax Loss Harvesting - Should you do it every opportunity?
« Reply #6 on: February 14, 2016, 05:47:46 PM »
It is not a good idea to tax loss harvest by actually changing your allocation. What you want to do is invest in something that is as similar as possible to the security you're divesting, while not triggering the IRS's "substantially identical" rule. More on this.

Westoftown

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Re: Tax Loss Harvesting - Should you do it every opportunity?
« Reply #7 on: February 14, 2016, 06:03:00 PM »
i agree, the only danger is that the biotech index will come back at a different rate that the total market.  I don't invest in biotech sectors specifically, but if you did then you probably have a rationale for doing that, so unless your strategy has changed - find something very similar, but not exactly the same.

Changing strategies because a sector is down is probably not the best idea, if you thought it was a good price 15% ago, then its probably a great price today.

RedmondStash

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Re: Tax Loss Harvesting - Should you do it every opportunity?
« Reply #8 on: February 15, 2016, 08:26:06 AM »
If you plan to tax loss harvest, set your cost basis to Specific ID (as opposed to average cost, FIFO, LIFO, etc...)  Each fund purchase will reflect what you actually paid for it.  If you reinvest dividends, that is a purchase and the cost basis for that lot will be whatever the fund costs on the day you invested those dividends.

That's good to know. I'm currently set to average cost, I think; I'll change it. Live and learn. Thanks for the info!