Author Topic: DIY: Tax Loss Harvesting  (Read 6012 times)

sb_NoVA

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DIY: Tax Loss Harvesting
« on: November 05, 2014, 12:03:46 PM »
I hold following in my taxable account:
VTIAX - $20k
VTSAX - $50k

I contribute about $1k every month to taxable account.  I don't have a fixed asset allocation percentage in mind.  How can I do tax loss harvesting myself.  I bought VTIAX only recently and am down about 3%.  I get dividends from both funds that get reinvested.  Also, what funds would be comparable but not identical to do tax loss harvesting. 

seattlecyclone

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Re: DIY: Tax Loss Harvesting
« Reply #1 on: November 05, 2014, 12:30:40 PM »
How to do it yourself? It's pretty simple. Sell your current funds and buy something else to replace them. That's all there is to it. Don't get back into the same fund for at least 31 days otherwise you'll have a wash sale that defers your loss until later.

The IRS has issued frustratingly little guidance on what "substantially identical" means in the context of mutual funds. You might be able to get away with trading VTSAX for a market-cap-weighted combination of VFIAX and VEXAX, for example, but you might not.

myDogIsFI

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Re: DIY: Tax Loss Harvesting
« Reply #2 on: November 05, 2014, 02:52:23 PM »
I recommend the bogleheads wiki page:
http://www.bogleheads.org/wiki/Tax_loss_harvesting

The two most common options you would take would be:

1.  Sell your VTIAX and put the proceeds in the money market fund.  Wait 31 days.  Repurchase the VTIAX.  This is the simplest thing to do and it gets you right back to your desired AA.  The disadvantage is that you may miss some gains while you are out of the market for the 31 days (you may also miss further losses).

2.  Sell your VTIAX and buy something like VFWAX.  Wait 31 days.  If the VFWAX has gone down, sell it and get back into VTIAX.  If it's gone up, then you are stuck.  You could still sell it but you'd pay short term capital gains.  You could wait a year and then sell and get the long term capital gains.  Or you could just hold onto it forever and build it into your asset allocation.  The advantage here is that you still get to participate in the market for the 31 days but you might wind up complicating your portfolio.

Consider whether it's worth it.  If you're down to $19,400 in VTIAX, you've got $600 in losses.  If you are using it to offset ordinary income at a 25% tax bracket, that's $150, plus you've now got a lower basis in the fund.  I'm not saying it's not worth it - $150 is a nice chunk of change - but just keep it in mind.

myDogIsFI

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Re: DIY: Tax Loss Harvesting
« Reply #3 on: November 05, 2014, 02:54:02 PM »
Oh, and don't forget to avoid a wash sale.   Turn off automatic reinvestment of dividends and make sure you aren't buying any VTIAX in a tax advantaged account (e.g., via automatic investment through your 401k).

sb_NoVA

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Re: DIY: Tax Loss Harvesting
« Reply #4 on: November 05, 2014, 07:26:16 PM »
Thanks for response, very helpful.

In my 401k, I hold SWISX with dividends reinvested.  Does that count same as VTIAX?  SWISX is Schwab's equivalent. 

myDogIsFI

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Re: DIY: Tax Loss Harvesting
« Reply #5 on: November 05, 2014, 08:15:06 PM »
As far as I know, there is no authoritative answer to the question of whether two funds from different companies that track the same index are "substantially identical" as per the wash sale rule.  Here's a page discussing the issue:

http://www.fairmark.com/capgain/wash/wsident.htm

IMHO, if you buy that fund in your 401k, it's a little risky - I wouldn't do it.  (Assuming that it tracks the same index).

But you probably have another foreign stock fund in your 401k that is actively managed.  You could use that.  In fact, this is my plan for tax harvesting when I have a drop that is big enough to make it worth it to me.  You can really only do this when you have foreign and US in both taxable and tax advantaged and you're willing to shift the proportion of US/foreign between the two spaces.

Essentially, you'd sell the VTIAX in taxable and buy VTSAX in taxable.  In the 401k, you'd sell VTSAX (or whatever US total market fund you have) and buy the foreign actively managed fund.  It's not a wash sale because you're moving from an indexed fund to an actively managed fund.  After 31 days, you'd sell the foreign actively manged fund in the 401k and buy the index fund (SWISX in your case).  You wouldn't worry about cap gains because it was done in tax advantaged space.

If foreign stocks have a loss, you can just buy back the fund you wanted in taxable and go back to your old allocation in the 401k, no sweat.  If the foreign stocks bounce back, you get to participate (minus the active management fees for one month, pretty small) and don't get stuck with that fund.  You couldn't keep this up indefinitely because you might eventually wind up with all US or foreign in tax advantaged, but as long as you've got both and you're indifferent as to which one is in taxable, it's feasible.

myDogIsFI

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Re: DIY: Tax Loss Harvesting
« Reply #6 on: November 05, 2014, 09:17:22 PM »
Ok, you may have just been asking whether you buying SWISX in your 401k would trigger the wash sale rule if you sold VTIAX in taxable.  There's no certain authority, but it's very reasonable to assume you would trigger the wash sale rule by purchasing SWISX within 31 days of selling VTIAX.  I would avoid it.

I have been thinking about this more since MMM's post about Betterment; I wonder if this triggered your OP about DIY TLH.  Most people have 401k's and you'd have to think about this if you were planning on getting the benefit of Betterment's TLH.  When I last looked into this, Betterment's FAQs suggested that you put your 401k assets into target date funds, so that they could run their algorithms without worrying about tripping the wash sale rule based on your automatic 401k contributions.

That's a reasonable suggestion, but it doesn't help me.  I don't have target date funds in my 401k.  My wife's 401k does not have target date funds.  We'd be driven to actively managed funds to do this right and avoid wash sales with Betterment; we'd also have to abandon our simple portfolio that is managed across all accounts as one account.  So, even though Betterment may be a good choice for many folks who can swing it with their 401ks and would rather DIY other stuff instead of investing, it does not make sense for us.