Author Topic: Tax loss harvest question  (Read 201 times)

JSMustachian

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Tax loss harvest question
« on: May 11, 2021, 05:39:18 AM »
Hello everyone,

Lets say you invest a large amount of money in an index fund in your taxable account and the market drops 5-10%. Do I need to hold the fund for 30 days before I can sell if I bought the same fund recently?

« Last Edit: May 11, 2021, 06:57:01 AM by JSMustachian »

secondcor521

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Re: Tax loss harvest question
« Reply #1 on: May 11, 2021, 07:22:28 AM »
You do not need to.

But if you do not, then to the extent that you bought shares 30 days prior to or 30 days after, then you will have a wash sale and the loss on those shares will not be deductible on your income tax return for the year in which the wash sale occurs.

https://www.irs.gov/publications/p550#en_US_2020_publink1000267956

I believe the amount of disallowed loss from the shares that you sold gets added to your basis for the shares that you bought, so the loss will eventually be realized and usable once you get out of the wash sale situation (or you die, whichever comes first!).

Also, in the case where you elect not to wait, if the funds were Vanguard funds, they may prevent you from buying further shares in an effort to discourage frequent trading.  This is a Vanguard policy, not a federal government policy.

terran

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Re: Tax loss harvest question
« Reply #2 on: May 11, 2021, 08:46:05 AM »
As long as you sell all of them you're definitely fine. I think you might still be fine if you bought them all at the same time, and only sold some of them, but I'm not as certain about that, and there wouldn't really be any reason to do this since you may as well take the full loss. What you need to avoid is anything that could be called a "replacement share" bought 30 days before/after the share(s) you sell.

secondcor521 is right the disallowed loss in a wash sale is added to the cost basis of the replacement shares, so if all transactions are in a taxable account then it's not terrible. The real problem is if you buy the replacement shares in a tax advantaged account because then you really do waste the loss deduction since cost basis doesn't matter in a tax advantaged account.