Author Topic: Tax Loss Harvesting - A Couple Questions on my situation  (Read 1775 times)

BiggerFishToFI

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Tax Loss Harvesting - A Couple Questions on my situation
« on: December 12, 2018, 08:58:10 AM »
Read through the other thread and for whatever reason this topic still confuses me.

I'm 100% VTSAX in my taxable account. Not including dividend reinvestment, I've bought twice this year. Once on 9/5/18, 69.5040 shares in the amount a $5070.34($72.95/share) and once on 9/12/18, 110.0410 shares at $8000 ($72.70/share).

Additionally, I bought $5000 in Crypto on 1/18/18, which is now worth $935.94

MFJ in the 22% bracket after subtracting out all tax-deferred contributions and standard deduction.

A couple questions:

1) Is tax-loss harvesting something I should definitely research like mad in the next couple days/weeks so that I can sell some investments/crypto and save some $$$ on my 2018 tax return?

2) As I understand it, I can sell 110.041 shares of VTSAX for $11797.90 and claim a loss of $1,272. I can immediately reinvest this cash in say VTIAX. I cannot make any contributions an any (taxable only?) account for 30 days to VTSAX or "similar" funds. I could not have purchased any shares of VTSAX for the past 60 days?

This loss would save me $1,272*0.22 = $279.94 on my 2018 tax bill

3) Can I do the same with Crypto? I can sell for $934.94 claiming a loss of $4064.06. This would save me $894.09 on my tax bill. Same rules as apply to the sale of VTSAX above.

4) Can I include dividend reinvestment for tax loss harvesting as well?

5) Can I tax loss harvest shares or crypto bought prior to 1/1/18? Any shares that I've bought at any time (>60 days) that were bought at a price greater than the price I sell them at?

Thanks!!

seattlecyclone

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #1 on: December 12, 2018, 10:07:48 AM »
1) Is tax-loss harvesting something I should definitely research like mad in the next couple days/weeks so that I can sell some investments/crypto and save some $$$ on my 2018 tax return?

The end of the year is coming, and tax loss harvesting could save you hundreds of dollars on your taxes, so a bit of learning in this area could prove worthwhile.

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2) As I understand it, I can sell 110.041 shares of VTSAX for $11797.90 and claim a loss of $1,272. I can immediately reinvest this cash in say VTIAX. I cannot make any contributions an any (taxable only?) account for 30 days to VTSAX or "similar" funds. I could not have purchased any shares of VTSAX for the past 60 days?

The key term is "substantially identical" securities. Whatever you sell for a loss, you need to not purchase any additional shares of that fund for 30 days in either direction in order to avoid a wash sale.

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3) Can I do the same with Crypto? I can sell for $934.94 claiming a loss of $4064.06. This would save me $894.09 on my tax bill. Same rules as apply to the sale of VTSAX above.

Yes, you can sell crypto for a capital loss, same as stock. Note that you can't claim a net capital loss of more than $3,000 in a year. If you haven't sold anything for a gain this year, any amount over $3,000 will roll over to the next year.

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4) Can I include dividend reinvestment for tax loss harvesting as well?

Dividend reinvestment definitely matters here. For tax purpose a dividend reinvestment is exactly the same as if you had received a cash dividend and immediately spent it on more shares. If the shares you bought from reinvestment have declined in value, you can harvest losses from them.

With the end of the year rolling around it's important to keep an eye on automatic reinvestment if you want to avoid wash sales. If you sell half your VTSAX for a loss today, the year-end dividend reinvestment on the other half would trigger a small wash sale because it's within 30 days of the sale. Not the end of the world if this happens, but I'd recommend disabling your automatic dividend reinvestment for any funds you plan on selling for a loss.

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5) Can I tax loss harvest shares or crypto bought prior to 1/1/18? Any shares that I've bought at any time (>60 days) that were bought at a price greater than the price I sell them at?

Yes, you can claim losses on shares you bought any amount of time ago.

terran

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #2 on: December 12, 2018, 10:22:57 AM »
1) I don't know that you need to research it like mad, but you might want to look into it enough that you can do it. The especially cool thing about loss harvesting is that you used up to $3000 as a deduction against ordinary income.

2) Since neither of your purchases were made within 30 days and VTSAX hasn't paid a dividend within 30 days then this sounds right. Since VTSAX will likely pay a dividend next week you need to turn off dividend reinvestment in any account that will continue to hold VTSAX.

3) I'm not familiar with crypto myself, but https://thedailycpa.com/2017/06/01/the-taxation-of-cryptocurrency/ indicates it's treated the same as other investments, so yes, you could realize that loss in the same way.  Note that you can only claim $3000 of losses that aren't offset by gains against ordinary income, so you won't get that full deduction this year, but the loss will carry over to next year when it can offset any income to the extent that the carry over loss exceeds next years realized gains.

4) Yes, reinvested dividends are just a service provided by your brokerage to automatically buy the investment using the dividend, so any such purchases currently showing a loss could also be sold to realize that loss. The flip side is that reinvested dividends resulting in the purchase of an asset with 30 days of a sale at a loss of that asset will cause a wash sale, so if you're going to tax loss harvest you need to turn off dividend reinvestment in all accounts that hold that investment.

5) Yes, any investment that is currently showing a loss can be sold to realize that loss. If you've held the investment for more than a year it will be a long term loss which can offset long term gains and the excess can offset ordinary income. Investments sold at a loss that were held less than a year will result in a short term loss which can offset either long term or short term gains, or ordinary income to the extent that the loss is greater than the gain.

I've alluded to it above, but make sure you don't rebuy an investment that you sell at a loss within 30 days before or after in ANY account. Some people say this only applies to IRAs in addition to taxable accounts because the IRS has specifically mentioned IRAs in relation to wash sales, and hasn't specifically mentioned 401(k)s/etc, but I wouldn't risk it -- I'd just assume you need to follow the rules for all account types.

Since you mention not buying "similar" investments, note that the actual standard is "substantially identical." This is obviously a term that is up for interpretation and the less alike two investments are the safer you are. Some people might even argue that you could rebuy VTI since it's an ETF while VTSAX is a mutual fund, but I wouldn't feel comfortable doing this. I am, however, comfortable buying a mutual fund or ETF that is still a US total market fund as long as it follows a different index than the one I sold. VTIAX would certainly work as it follows international, but you could get closer if you want too.

One final thing to note if you plan to sell some but not all of an investment in an account is that you want to tell your brokerage that you want to use specific identification cost basis tracking which means you can choose to sell particular groups of the investment based on when you buy it. If you don't do this they may use some other method like average cost (just take the average cost basis of all shares and use that as the purchase price), or first in first out (FIFO - sell the first thing you bought), both of which could cause a wash sale even if you sell the same number of shares as you bought within 30 days.

Arbitrage

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #3 on: December 12, 2018, 10:41:10 AM »
Rather than swapping your VTSAX for VTIAX, I'd recommend something similar but not substantially identical.  An S&P 500 fund is perfectly fine to swap to, such as VFIAX.  Swapping to an international fund is changing your asset allocation.  Unless that's really what you want to do (nothing against international funds; I invest very substantially in them), switch to something that will perform about the same.

Make sure you don't have VTSAX...or perhaps even VTI...in another account like an IRA.  If you do, you should ensure that you've followed the same purchasing restrictions in those accounts.  Also, take your distributions in cash, so you don't trigger a wash sale with end-of-the-year distributions. 

If you're not selling all of your VTSAX in your taxable account (if these are just the shares with losses), similarly send your distributions to cash.

Definitely harvest those cryptos.  If you really believe in cryptos for whatever reason, I think you can re-buy without triggering a wash sale without the waiting period. 

https://www.irsmedic.com/blog/2018/07/wash-sales-crypto-currencies.html

secondcor521

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #4 on: December 12, 2018, 11:09:23 AM »
FYI, VTSAX is going to pay a dividend on 12/24 to shareholders as of 12/20.  I'm not exactly sure by when you would need to turn off your dividend reinvestment, but it is certainly in the next few days to a week.

http://vanguard.com/pdf/RET891511_122018_final.pdf

BiggerFishToFI

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #5 on: December 13, 2018, 07:38:55 AM »
Thanks for all the feedback! I will get in today and turn off all my dividend reinvestment.

Question about the carry over - if I had a $12000 loss, could I carry that over for the next 3 years or is there a limit to the amount / time you can carry over to the following years taxes?

Is there a limit to the amount of dividends or capital gains that losses can offset? Or do the limits only apply to ordinary income?

Thanks again!

appleshampooid

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #6 on: December 13, 2018, 07:53:39 AM »
Thanks for all the feedback! I will get in today and turn off all my dividend reinvestment.

Question about the carry over - if I had a $12000 loss, could I carry that over for the next 3 years or is there a limit to the amount / time you can carry over to the following years taxes?

Is there a limit to the amount of dividends or capital gains that losses can offset? Or do the limits only apply to ordinary income?

Thanks again!
You can carry over losses indefinitely until they are used up. But they go to offset gains first, then regular income. The $3000/year cap is only for offsetting other (non-capital gain) income.

There is no limit to the amount of capital gains that your capital losses offset. But dividends fall into the other bucket - non-capital gain income. So the limit there is the same as for earned/wage income ($3000/year).

For a simplified example, say you had $5000 of capital gains, $300 in dividends, and $12000 of capital losses.

First the $5000 of gains is wiped out, leaving you with $7000 of capital losses left. The $300 in dividends is essentially lumped in with your wage/earned income for this purpose, so you would use $3000 of your losses to reduce your income (including that $300 in dividends), and you would carry over $4000 of capital losses to future years.

Someone please check my understanding here, as I haven't had my second cup of coffee yet.

secondcor521

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #7 on: December 13, 2018, 09:16:41 AM »
Thanks for all the feedback! I will get in today and turn off all my dividend reinvestment.

Question about the carry over - if I had a $12000 loss, could I carry that over for the next 3 years or is there a limit to the amount / time you can carry over to the following years taxes?

Is there a limit to the amount of dividends or capital gains that losses can offset? Or do the limits only apply to ordinary income?

Thanks again!
You can carry over losses indefinitely until they are used up. But they go to offset gains first, then regular income. The $3000/year cap is only for offsetting other (non-capital gain) income.

There is no limit to the amount of capital gains that your capital losses offset. But dividends fall into the other bucket - non-capital gain income. So the limit there is the same as for earned/wage income ($3000/year).

For a simplified example, say you had $5000 of capital gains, $300 in dividends, and $12000 of capital losses.

First the $5000 of gains is wiped out, leaving you with $7000 of capital losses left. The $300 in dividends is essentially lumped in with your wage/earned income for this purpose, so you would use $3000 of your losses to reduce your income (including that $300 in dividends), and you would carry over $4000 of capital losses to future years.

Someone please check my understanding here, as I haven't had my second cup of coffee yet.

That matches my understanding, with two minor details:

1.  Long term and short term losses are netted together separately and then netted together at a later step, and long term and short term losses are carried over as separate numbers.
2.  You can carry over losses as long as you're alive.  When you die, any unused carryover capital losses die with you.

I would suggest the OP take a look at Schedule D and the instructions, especially for lines 6, 14 and 21.  It might also help to take a look at the Qualified Dividends and Capital Gain Tax Worksheet and the  Capital Loss Carryover
Worksheet, especially one that is filled in with their particular tax situation. 

appleshampooid

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #8 on: December 13, 2018, 09:37:03 AM »
Thanks for all the feedback! I will get in today and turn off all my dividend reinvestment.

Question about the carry over - if I had a $12000 loss, could I carry that over for the next 3 years or is there a limit to the amount / time you can carry over to the following years taxes?

Is there a limit to the amount of dividends or capital gains that losses can offset? Or do the limits only apply to ordinary income?

Thanks again!
You can carry over losses indefinitely until they are used up. But they go to offset gains first, then regular income. The $3000/year cap is only for offsetting other (non-capital gain) income.

There is no limit to the amount of capital gains that your capital losses offset. But dividends fall into the other bucket - non-capital gain income. So the limit there is the same as for earned/wage income ($3000/year).

For a simplified example, say you had $5000 of capital gains, $300 in dividends, and $12000 of capital losses.

First the $5000 of gains is wiped out, leaving you with $7000 of capital losses left. The $300 in dividends is essentially lumped in with your wage/earned income for this purpose, so you would use $3000 of your losses to reduce your income (including that $300 in dividends), and you would carry over $4000 of capital losses to future years.

Someone please check my understanding here, as I haven't had my second cup of coffee yet.

That matches my understanding, with two minor details:

1.  Long term and short term losses are netted together separately and then netted together at a later step, and long term and short term losses are carried over as separate numbers.
2.  You can carry over losses as long as you're alive.  When you die, any unused carryover capital losses die with you.

I would suggest the OP take a look at Schedule D and the instructions, especially for lines 6, 14 and 21.  It might also help to take a look at the Qualified Dividends and Capital Gain Tax Worksheet and the  Capital Loss Carryover
Worksheet, especially one that is filled in with their particular tax situation.
Right, thank you. I had meant to mention the short/long term thing as a further complication that I had glossed over for the simple example, but forgot to mention that.

I also didn't know that the carryover period died with you, that's good info. I don't plan on dying for a while, but you never know :).

GUNDERSON

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #9 on: December 13, 2018, 09:50:51 AM »
Do you mind if I add an additional question on this topic? The 30-day window applies to 30 days before and after the SALE, rather than the purchase date, is that correct? So if I bought a bunch of VTI every few days over a month-long period, that proximity in time doesn't really matter? What matters is that I didn't buy any more VTI 30 days before or after I actually SELL them? And if I have bought VTI within 30 days of the sell date, I could neutralize a potential wash sale by also selling those shares?


terran

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #10 on: December 13, 2018, 10:37:09 AM »
Do you mind if I add an additional question on this topic? The 30-day window applies to 30 days before and after the SALE, rather than the purchase date, is that correct? So if I bought a bunch of VTI every few days over a month-long period, that proximity in time doesn't really matter? What matters is that I didn't buy any more VTI 30 days before or after I actually SELL them? And if I have bought VTI within 30 days of the sell date, I could neutralize a potential wash sale by also selling those shares?

Correct on both counts.

Make sure you've elected to have your broker use specific identification cost basis tracking, and that you've turned off dividend reinvestment in all accouns that hold the investment if you're going to sell some, but not all of a position.

BiggerFishToFI

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #11 on: December 14, 2018, 12:59:59 PM »
Thanks again everyone.

I've turned off auto-reinvestment of dividends for all my accounts with VTSAX.

When making the sale, do I need to specify which shares I sell? Is there even a way to do that through Vanguards site? Or do I just sell the number of shares out of the account and claim that those are the shares that I bought during September?

secondcor521

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #12 on: December 14, 2018, 01:35:11 PM »
Thanks again everyone.

I've turned off auto-reinvestment of dividends for all my accounts with VTSAX.

When making the sale, do I need to specify which shares I sell? Is there even a way to do that through Vanguards site? Or do I just sell the number of shares out of the account and claim that those are the shares that I bought during September?

There is a way to do it through the Vanguard site.  It will be called specific identification or something similar.  You may need to change your sell preferences in your profile to this option from whatever it is currently set to.  You will need to change your sell preferences before you actually execute the sale.  If you have previously sold shares in the account, Vanguard may prohibit you from switching your sell preferences.  If this occurs, it is because Vanguard is following the law which restrict switching your cost basis method in certain situations.

I recommend against the method of "selling and claiming" embodied in your last question.  The law requires you to notify your custodian (Vanguard in this case) of which shares you are selling before the sale occurs.  The reason for this law is to prevent people from changing their mind later to a potentially better tax situation:  "Oh, I didn't mean to sell *those* shares over there; I meant to sell *these* shares over here!"  Also, if you go execute a sale, Vanguard will identify shares according to whatever your sell preferences are at the time of the order and will report the sale and (very likely) basis information to the IRS.  If your tax reporting differs from Vanguard's, the IRS will go with what Vanguard tells them and you'll start hearing from the IRS to correct the discrepancies.

Arbitrage

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Re: Tax Loss Harvesting - A Couple Questions on my situation
« Reply #13 on: December 15, 2018, 06:57:54 AM »
Yes, you need to set your Cost Basis method to "Specific Identification of Shares."  Otherwise, the default is "First In, First Out" and Vanguard will sell the shares in that manner.