Author Topic: First Time Tax Loss Harvester Question  (Read 7528 times)

rainydaysaver

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First Time Tax Loss Harvester Question
« on: January 16, 2016, 04:59:02 PM »
Until the last year, I've only been taking advantage of taxed deferred investment accounts. I finally reached the point where I can max these accounts out and also start saving in a taxable investment account. In April of 2015 I opened an account with Vanguard and invested 10K and then began adding $100/month. Everything is invested in VTSAX. My last deposit was Dec 17th and I received dividends on Dec 18th. I'd like to take advantage of this market dip to practice my first tax loss harvesting transaction. I plan to sell my entire holdings, temporarily invest them in another fund, and then after 30 days, repurchase VTSAX since that is what I feel most comfortable with for now. If I understand correctly, I need to:
  • Make sure do not purchase any VTSAX in either 30 days prior to or 30 days after my sale, (in this account or any other), to avoid a wash sale.
  • Make sure the other fund I temporarily purchase is not a comparable fund.
  • Since I received dividends, I must hold the shares for at least 61 days for the dividends to remain "qualified".

My question is about holding shares for 61 days so that dividends remain qualified... Does this mean that I must just own VTSAX in general for over 61 days (as I have); or that I must hold the specific dividends I received for 61 days, and if I want to sell all my shares must wait until 61 days after I received my dividends.

Thanks for any advice, or if anyone can point me to another resource!

seattlecyclone

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Re: First Time Tax Loss Harvester Question
« Reply #1 on: January 17, 2016, 09:40:14 AM »
  • Make sure do not purchase any VTSAX in either 30 days prior to or 30 days after my sale, (in this account or any other), to avoid a wash sale.
  • Make sure the other fund I temporarily purchase is not a comparable fund.
  • Since I received dividends, I must hold the shares for at least 61 days for the dividends to remain "qualified".

Sounds right.

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My question is about holding shares for 61 days so that dividends remain qualified... Does this mean that I must just own VTSAX in general for over 61 days (as I have); or that I must hold the specific dividends I received for 61 days, and if I want to sell all my shares must wait until 61 days after I received my dividends.

You must hold the shares that paid the dividends for at least 61 days surrounding the ex-dividend date. Note that this period can be satisfied entirely before the ex-dividend date; if you held the shares for several months beforehand, you can sell the day after the ex-dividend date and the dividend can still be qualified.

You don't need to hold on to the actual dividends. What you do with that money is irrelevant for the purpose of determining qualified dividends. Just be aware that if you had automatic dividend reinvestment enabled, that purchase can count as part of the 30-day wash sale window. However this point is moot if you sell these shares at the same time as the rest of your holdings.

rainydaysaver

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Re: First Time Tax Loss Harvester Question
« Reply #2 on: January 17, 2016, 12:44:40 PM »
Thanks so much for your reply. I had not yet heard the term ex-dividend, so I appreciate you bringing it up so I could read about it. I still have a lot to learn, but am looking forward to putting this new knowledge into practice!

seattlecyclone

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Re: First Time Tax Loss Harvester Question
« Reply #3 on: January 17, 2016, 01:16:58 PM »
One thing I didn't mention is that Vanguard generally doesn't let you buy shares of a mutual fund within 60 days after selling it. This is to keep their own turnover down. Be prepared to hold your replacement fund for that long.

rainydaysaver

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Re: First Time Tax Loss Harvester Question
« Reply #4 on: January 17, 2016, 01:57:14 PM »
Thank you! I had read somewhere that you can get around Vanguards 60 day wait period by making the request in writing. I plan to contact them and ask about it, but I can live with 60 days in another fund if need be.

Jim2001

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Re: First Time Tax Loss Harvester Question
« Reply #5 on: January 18, 2016, 01:39:00 PM »
I understand the concept of tax loss harvesting which is to sell losers to offset winners.  But if what you hold is an investment you really want to hold long term, why sell in the first place?  If where you want to park your money is better investment the old, buy the new and move on?

What is it exactly that you're trying to accomplish with this seemingly complicated market timing, potentially a IRS flagged "wash sale" transaction anyway? 

seattlecyclone

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Re: First Time Tax Loss Harvester Question
« Reply #6 on: January 18, 2016, 05:09:22 PM »
I understand the concept of tax loss harvesting which is to sell losers to offset winners.  But if what you hold is an investment you really want to hold long term, why sell in the first place?  If where you want to park your money is better investment the old, buy the new and move on?

What is it exactly that you're trying to accomplish with this seemingly complicated market timing, potentially a IRS flagged "wash sale" transaction anyway?

The point is to defer taxes, and increase your stash in the process. If you have a net capital loss for the year, you may deduct the first $3,000 of that loss at your current marginal tax rate. Then when you realize a long-term gain in the future, you get to pay tax at a much lower capital gains rate. Also the money you save on your taxes by recognizing a loss this year can compound over time.

Here's an example.

Suppose you're currently in the 25% tax bracket and plan to be in the 15% tax bracket when you retire.

Suppose you bought $20,000 of VTSAX (US Total Market stock index fund). The value has since fallen to $17,000. You sell the shares and book a $3,000 loss. This loss gives you $750 back on your taxes this year. You then invest your $17,750 in VFINX (US S&P 500 index fund). By the time you retire the fund doubles in value, so you now have shares worth $35,500. This represents a $17,750 capital gain, but you don't owe any tax on it when you sell because you're in the 15% tax bracket.

What if you didn't harvest losses? You retire with shares that are worth only $34,000, and you still owe no capital gains taxes, so $34,000 is what you get to keep. $35,500 is more than $34,000. Tax loss harvesting can be profitable.

PhysicianOnFIRE

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Re: First Time Tax Loss Harvester Question
« Reply #7 on: January 18, 2016, 08:53:41 PM »
Thank you! I had read somewhere that you can get around Vanguards 60 day wait period by making the request in writing. I plan to contact them and ask about it, but I can live with 60 days in another fund if need be.

Good news!  Vanguard changed the policy from 60 days to 30 days last fall.  Before that, there were cumbersome workarounds.  http://www.reuters.com/article/us-vanguard-funds-trading-idUSKCN0RG1Y520150916

MustacheAndaHalf

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Re: First Time Tax Loss Harvester Question
« Reply #8 on: January 19, 2016, 12:50:48 AM »
If you reinvested dividends, I'd wait 30 days from the dividend date.  But if you didn't reinvest, you should be good to go on all but 56 cents of the dividend (the Dec 17th purchase is worth ignoring).

I personally like to use S&P 500 and Total Stock Market as close but not identical (about 73% overlap).  But I found a better one if you have a brokerage account: Schwab U.S. Broad Market ETF (SCHB) with a 0.03% expense ratio and 3% turnover.  It has half as many stocks (S&P 1500) as Vanguard Total Stock Market, so I wouldn't savor the lower expense ratio overly much.

As long as you're jumping from one low cost index fund tracking the broad US market... to another, I wouldn't consider it market timing.  You're staying vested in the US market, just drifting far enough so the IRS considers it a different asset.

seattlecyclone

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Re: First Time Tax Loss Harvester Question
« Reply #9 on: January 19, 2016, 10:43:48 AM »
I just want to add that deferring income tax liability can be beneficial even if you aren't expecting your future income tax rate to be lower than at present.

Let's revisit the scenario I laid out above, but with one major difference: all of your income is taxed at 25%, both regular and capital gains income, now and in the future.

The tax loss harvester will still sell her shares for $17,000, and will still save 25% on her taxes this year. She then has shares with cost basis of $17,750 that she sells for $35,500. This represents a $17,750 capital gain, which creates a $4,437.50 tax bill. The tax loss harvester is left with $31,062.50 after selling her shares and paying her tax.

The investor who didn't harvest losses ends up with shares worth $34,000 and cost basis of $20,000, for a capital gain of $14,000. The tax on this gain would be $3,500, leaving this investor with $30,500 after taxes.

As you can see, even without favorable tax rates, the investor who harvested losses when she had an opportunity ends up with 1.8% more money after taxes than the investor who didn't. The real number would actually be a bit higher because that $750 of tax savings that was reinvested would pay dividends, which would compound over time and increase the advantage of harvesting losses a bit further.

catccc

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Re: First Time Tax Loss Harvester Question
« Reply #10 on: January 19, 2016, 10:52:02 AM »
Yet another scenario where there can also be a benefit even if you expect no change in your tax bracket under current rules. 

I'm currently in the 15% tax bracket, and executed my first tax loss harvesting move in August 2015.  Since I have no other gains to offset the losses in 2015, I get to deduct the $3K of losses from my ordinary income, which is taxed at 15%, putting $450 I would have paid in taxes back in my pocket (15% of $3K).  When I sell, I expect I will still be in the 15% tax bracket, making my capital gains tax rate 0%.

Travis

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Re: First Time Tax Loss Harvester Question
« Reply #11 on: January 19, 2016, 11:16:56 AM »
How often would you want to TLH? Just once a year?  Could you conceivably spend your accumulation years bouncing between these two funds during down market years?  How do you know when to execute a TLH?  Say my VTSAX lost $30k in the last month, but this week it ticked up $1000. Is that still a loss?  As long as I'm selling and switching funds before it reacquires that peak does it still count?

Also, does my Roth IRA factor into this or does TLH just deal with the taxable part of the portfolio?  I'm holding VSTAX in both.
« Last Edit: January 19, 2016, 11:38:54 AM by Travis »

seattlecyclone

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Re: First Time Tax Loss Harvester Question
« Reply #12 on: January 19, 2016, 01:19:01 PM »
How often would you want to TLH? Just once a year?  Could you conceivably spend your accumulation years bouncing between these two funds during down market years?  How do you know when to execute a TLH?  Say my VTSAX lost $30k in the last month, but this week it ticked up $1000. Is that still a loss?

What matters is how the price now compares to the price when you bought it. If it went down $30k since you bought it and then bounced back up $1,000, you're still down $29k and could still sell to realize a loss. Over the long term you expect your index funds to increase in value significantly (that's why you bought them, after all!), so harvesting losses is generally only going to be possible for shares you have acquired in the past few years. If you get to the point where you can harvest losses on 20-year-old shares, we've got some pretty big economic issues going on.

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Also, does my Roth IRA factor into this or does TLH just deal with the taxable part of the portfolio?  I'm holding VSTAX in both.

Tax loss harvesting is only beneficial in taxable accounts. You do have to keep retirement account transactions is mind when ensuring you avoid wash sales, but you won't be specifically harvesting losses in your retirement accounts.

As to the question of how often you would want to harvest losses, you get most of the benefit from doing it once or twice per year. When you hear about the market going down a lot, that might be an especially good time to look into it. Checking more often can increase the benefit slightly, but you get diminishing returns past a certain point.

rainydaysaver

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Re: First Time Tax Loss Harvester Question
« Reply #13 on: January 19, 2016, 03:12:44 PM »
Quote
If you reinvested dividends, I'd wait 30 days from the dividend date.  But if you didn't reinvest, you should be good to go on all but 56 cents of the dividend (the Dec 17th purchase is worth ignoring).

I personally like to use S&P 500 and Total Stock Market as close but not identical (about 73% overlap).  But I found a better one if you have a brokerage account: Schwab U.S. Broad Market ETF (SCHB) with a 0.03% expense ratio and 3% turnover.  It has half as many stocks (S&P 1500) as Vanguard Total Stock Market, so I wouldn't savor the lower expense ratio overly much.

Thanks, I did have dividends set to automatically reinvest, so was counting that last dividend date as my last purchase date and waited until today to be safe (Dec 18th - Jan 19th). Also appreciate the suggestion for an alternative fund that is comparable!

Travis

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Re: First Time Tax Loss Harvester Question
« Reply #14 on: January 19, 2016, 04:10:37 PM »
How often would you want to TLH? Just once a year?  Could you conceivably spend your accumulation years bouncing between these two funds during down market years?  How do you know when to execute a TLH?  Say my VTSAX lost $30k in the last month, but this week it ticked up $1000. Is that still a loss?

What matters is how the price now compares to the price when you bought it. If it went down $30k since you bought it and then bounced back up $1,000, you're still down $29k and could still sell to realize a loss. Over the long term you expect your index funds to increase in value significantly (that's why you bought them, after all!), so harvesting losses is generally only going to be possible for shares you have acquired in the past few years. If you get to the point where you can harvest losses on 20-year-old shares, we've got some pretty big economic issues going on.

Quote
Also, does my Roth IRA factor into this or does TLH just deal with the taxable part of the portfolio?  I'm holding VSTAX in both.

Tax loss harvesting is only beneficial in taxable accounts. You do have to keep retirement account transactions is mind when ensuring you avoid wash sales, but you won't be specifically harvesting losses in your retirement accounts.

As to the question of how often you would want to harvest losses, you get most of the benefit from doing it once or twice per year. When you hear about the market going down a lot, that might be an especially good time to look into it. Checking more often can increase the benefit slightly, but you get diminishing returns past a certain point.

Thanks for the response.  After executing a TLH, do you keep your money in the new fund until it's time to TLH again, or do you put it back in the original fund at some point?

seattlecyclone

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Re: First Time Tax Loss Harvester Question
« Reply #15 on: January 19, 2016, 04:25:41 PM »
Thanks for the response.  After executing a TLH, do you keep your money in the new fund until it's time to TLH again, or do you put it back in the original fund at some point?

This really depends on how the market does in the next 30 days. If it's down or relatively flat, I'll often go back to the original fund. If it has gone up quite a bit, I might leave the money in the new fund. Remember that you don't expect to be able to harvest losses on the same shares over and over again. At some point your investment will go above its cost basis and never dip below again. Therefore you need to be prepared to stay in your replacement fund indefinitely if the market makes a quick rebound during that first month and never dips to that level again.

FerrumB5

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Re: First Time Tax Loss Harvester Question
« Reply #16 on: January 19, 2016, 05:03:38 PM »
Is exchanging one fund for another in Vanguard effectively a sell and buy? Want to exchange VIMAX for VTSAX for a capital loss for the same TLH purposes.

seattlecyclone

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Re: First Time Tax Loss Harvester Question
« Reply #17 on: January 19, 2016, 05:16:20 PM »
Yes.

Travis

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Re: First Time Tax Loss Harvester Question
« Reply #18 on: January 20, 2016, 03:40:06 PM »
So I looked into my account and for VTIAX my last purchase was on 31 Dec.  I have short and long term losses of $3000 and $17000 in this fund.  I set capital gains and dividends to reinvest in my Money Market account.  If I wait until at least 1 Feb and exchange the whole thing for VFWAX this will take care of my TLH for the year?  And after that if I'm happy with the fund just drive on with new contributions to VFWAX after 3 Mar?

seattlecyclone

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Re: First Time Tax Loss Harvester Question
« Reply #19 on: January 20, 2016, 04:04:47 PM »
Assuming you don't sell any securities for a gain, that $20k loss would max out your capital loss deduction for several years. Any amount of loss over $3,000 will generally carry over to the next year. You also wouldn't need to worry much about selling VFWAX for a small gain if you really would prefer to be in VTIAX for the long term.

Jim2001

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Re: First Time Tax Loss Harvester Question
« Reply #20 on: January 20, 2016, 08:19:58 PM »
seattlecyclone,

  In your scenario, you suggest moving from one fund to another.  The OP  wanted to get the money back into the original fund as quickly as possible and it didn't sound like there were any profits to offset.  According to my tax guy, passive losses can't be used to offset earned income.  So, my question to the OP still stands.  What is the goal in this specific case?

seattlecyclone

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Re: First Time Tax Loss Harvester Question
« Reply #21 on: January 20, 2016, 08:26:00 PM »
Your "tax guy" is wrong. Capital losses offset capital gains first, but if you have a net capital loss the first $3,000 of this loss can be used to offset other income. Any remainder carries over to the next year. See https://www.irs.gov/taxtopics/tc409.html to read more.

MustacheAndaHalf

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Re: First Time Tax Loss Harvester Question
« Reply #22 on: January 21, 2016, 12:14:16 PM »
Travis - Should you be setting up your own thread, instead of taking over rainydaysaver's thread?

Travis

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Re: First Time Tax Loss Harvester Question
« Reply #23 on: January 21, 2016, 12:49:19 PM »
I probably should if I have any more questions.  I had questions similar to rainyday's and it made sense at the time to tack them on for clarification.

rainydaysaver

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Re: First Time Tax Loss Harvester Question
« Reply #24 on: January 22, 2016, 03:47:37 PM »
So, my question to the OP still stands.  What is the goal in this specific case?

It won't be a big loss for me, but I'd like to create a loss to offset earned income, with the plan that I'll be in a lower tax bracket when I do pull that money out to use towards retirement later on. Also, I'm kind of a nerd and find this stuff fascinating, so if I spend a couple hours reading to figure out how to save a hundred bucks or so on my taxes, it makes my week.

Travis - Should you be setting up your own thread, instead of taking over rainydaysaver's thread?

I'm new to the forum and not sure of the etiquette, but if it's appropriate, I don't mind at all. :)
« Last Edit: January 22, 2016, 03:59:01 PM by rainydaysaver »

MustacheAndaHalf

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Re: First Time Tax Loss Harvester Question
« Reply #25 on: January 22, 2016, 07:06:29 PM »
If you like geek reading about taxes, the first half page of this link is the IRS explaining it.  Read the overview and "example 1" and it can help.  Of the pages and pages the IRS puts out, this is probably the most relevant half page to investors:
https://www.irs.gov/publications/p550/ch04.html#en_US_2015_publink100010601

Jim2001

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Re: First Time Tax Loss Harvester Question
« Reply #26 on: January 24, 2016, 01:06:09 PM »

It won't be a big loss for me, but I'd like to create a loss to offset earned income, with the plan that I'll be in a lower tax bracket when I do pull that money out to use towards retirement later on. Also, I'm kind of a nerd and find this stuff fascinating, so if I spend a couple hours reading to figure out how to save a hundred bucks or so on my taxes, it makes my week.


Rainydaysaver,

  It sounds like you're getting the results you wanted - Thanks for clarifying.

Seattlecyclone,

   So my guy isn't necessarily wrong, but there is a phase out at $3K, which means it's useful for some but not all.

seattlecyclone

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Re: First Time Tax Loss Harvester Question
« Reply #27 on: January 24, 2016, 02:22:04 PM »
Unless your marginal tax bracket is 0%, removing $3,000 from your income is typically a good thing for everyone.

Jim2001

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Re: First Time Tax Loss Harvester Question
« Reply #28 on: January 24, 2016, 02:48:00 PM »
Unless your marginal tax bracket is 0%, removing $3,000 from your income is typically a good thing for everyone.

Well that makes a bunch more sense now - I've touched 0% four out of the last eight years.

Ursus Major

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Re: First Time Tax Loss Harvester Question
« Reply #29 on: January 24, 2016, 04:24:14 PM »
Unless your marginal tax bracket is 0%, removing $3,000 from your income is typically a good thing for everyone.

Well that makes a bunch more sense now - I've touched 0% four out of the last eight years.
And if you are in the 15% tax bracket, your long term cap gains rate is also zero, so nothing to harvest there either.

seattlecyclone

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Re: First Time Tax Loss Harvester Question
« Reply #30 on: January 24, 2016, 04:58:58 PM »
Unless your marginal tax bracket is 0%, removing $3,000 from your income is typically a good thing for everyone.

Well that makes a bunch more sense now - I've touched 0% four out of the last eight years.
And if you are in the 15% tax bracket, your long term cap gains rate is also zero, so nothing to harvest there either.

False. If you have a net capital loss, that counts against your regular income at your regular marginal rate. In the 15% bracket, this could cut your taxes by as much as $450 ($3,000 * 15%).

Ursus Major

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Re: First Time Tax Loss Harvester Question
« Reply #31 on: January 24, 2016, 05:08:00 PM »
Unless your marginal tax bracket is 0%, removing $3,000 from your income is typically a good thing for everyone.

Well that makes a bunch more sense now - I've touched 0% four out of the last eight years.
And if you are in the 15% tax bracket, your long term cap gains rate is also zero, so nothing to harvest there either.

False. If you have a net capital loss, that counts against your regular income at your regular marginal rate. In the 15% bracket, this could cut your taxes by as much as $450 ($3,000 * 15%).
Cool, then I have learned something new today. :-)

rainydaysaver

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Re: First Time Tax Loss Harvester Question
« Reply #32 on: February 05, 2016, 03:56:31 PM »
If you like geek reading about taxes, the first half page of this link is the IRS explaining it.  Read the overview and "example 1" and it can help.  Of the pages and pages the IRS puts out, this is probably the most relevant half page to investors:
https://www.irs.gov/publications/p550/ch04.html#en_US_2015_publink100010601

Sorry for the late reply, I started reading through this last weekend. Great resource, thank you!!!