Author Topic: Prepping for Tax Loss Harvesting  (Read 1026 times)

catccc

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Prepping for Tax Loss Harvesting
« on: October 12, 2018, 01:00:56 PM »
In late August, I put $20K into VTSAX.  (It was sitting around because I was thinking I was going to replace our car.  Ultimately decided against the car, and put it into VTSAX.)

Around the same time, I started an automatic investment of a small amount ($200) into my taxable investments every other week, also purchasing VTSAX.

I thought I would want to be prepared for a possible tax loss harvesting move with recent market activity, selling some of the $20K of VTSAX I bought in August, and buying VFIAX to stay in the market.  Current losses on the $20K investment are just under $1,400.  I have 5K of capital gains for 2018 that will be taxed at 0%, so I would need the losses to be over $5K before I even see a tax benefit.  Losses over the $5K will net me 12% savings in taxes.  Max reduction of ordinary income would be $3K per IRS rules, resulting in tax savings of $360.

I just switched my small automated investment to VFIAX in preparation, since wash sales rules are in effect for purchases 30 days before and after the sale that triggers the loss.

Anyone have any thoughts on my plan?  $360 not worth the trouble?  Losses of 8K unlikely?  This is overthinking, just stay the course?  Other feedback?

Penn42

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Re: Prepping for Tax Loss Harvesting
« Reply #1 on: October 12, 2018, 01:31:34 PM »
I'm interested in this as well.  This will be the first year I'll (potentially) even have had the opportunity to harvest some losses.  The total amount won't be very much, but I'd like to do it anyway to learn the actual process and become more familiar with the tax paperwork. 

First step will probably be calling Vanguard and figuring out what the process for selling a specific share is.

Second I probably need to figure out what would constitute a wash sale. 

Third, figure out the name of the form I record the sale on?

I'm not sure what else there is to it.  I'll be watching this thread.

PathtoFIRE

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Re: Prepping for Tax Loss Harvesting
« Reply #2 on: October 12, 2018, 01:45:46 PM »
I have 5K of capital gains for 2018 that will be taxed at 0%, so I would need the losses to be over $5K before I even see a tax benefit.
Were these realized or unrealized gains?

Losses of 8K unlikely?
Probably unlikely, but depends on if you have previous purchases in your taxable account that will turn negative if markets continue to go down.

I just switched my small automated investment to VFIAX in preparation, since wash sales rules are in effect for purchases 30 days before and after the sale that triggers the loss.
Yes, and don't forget to turn off automatic dividend reinvesting if there are going to be any shares of VTSAX remaining.

First step will probably be calling Vanguard and figuring out what the process for selling a specific share is.
It can all be done online, it's super easy, and Vanguard will send you a 1099-B to include in your tax return.

As far as whether to do it, I waited until I had accrued what was about 5 years or $15k in losses before I pulled the trigger in 2015 (and then did it again in 2016 to get about another 3k, or another year). I had some mild interest, but with the partial recovery, I'm going to wait until we see some substantial and sustained losses. Especially if you're like me and you are using mutual funds instead of ETFs and many of your shares are borderline losses, then you could decide to sell what look like losers in the early afternoon and find out at closing that many ended up recovering.

Aggie1999

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Re: Prepping for Tax Loss Harvesting
« Reply #3 on: October 12, 2018, 01:52:24 PM »
I did some tax loss harvesting back in Sept on international funds. Few points:

- If you went with the default (average cost) when setting up the account you need to switch the account to specific share cost or whatever your brokerage calls it. This is for mutual funds. With Vanguard and Fidelity this can be done online and it is retroactive on all shares previously purchased. With Schwab, they make you sign a physical form and scan it in. Even then with Schwab it is not retroactive to previous purchases. Pretty big annoyance. Even after doing this with Schwab, when I purchased new shares it still would not break those out for me to sell.
- Note that tax loss harvesting is simply postponing taxes. Your basis resets so when we sell for a profit in the future you will pay taxes on a larger amount. Good if you will be in a lower tax bracket when you sell at a profit. Bad if you will be in a higher tax bracket.

For me, assuming I was in a high tax bracket, saving $360 on taxes would be worth the hassle. Hell, the way international is going, you may be able to do some more harvesting before the end of the year! :D

catccc

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Re: Prepping for Tax Loss Harvesting
« Reply #4 on: October 12, 2018, 01:59:34 PM »
Thanks PathtoFIRE! 

The gains are realized.  Thanks for the tip about turning off DRIP.  I doubt my earlier investments would yield any losses.  I've always been great about maxing out my tax advantaged investments, but really infrequently would invest in my taxable account.  A bulk of the shares were purchased in 2014, and I did some TLH in 2015.

Penn42, you can set your default cost basis to specific ID some place on vanguard's website.  I did this a long time ago so I can't remember exactly where it is, but I'm sure if you poke around the site you can find it.


catccc

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Re: Prepping for Tax Loss Harvesting
« Reply #5 on: October 12, 2018, 02:01:41 PM »
- Note that tax loss harvesting is simply postponing taxes. Your basis resets so when we sell for a profit in the future you will pay taxes on a larger amount. Good if you will be in a lower tax bracket when you sell at a profit. Bad if you will be in a higher tax bracket.

Thanks!  I'm been in 0% capital gains tax bracket and will likely stay there.  So the nice thing is I can reduce my ordinary taxable income, and when I harvest gains later, they'll be at 0%.

Aggie1999

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Re: Prepping for Tax Loss Harvesting
« Reply #6 on: October 12, 2018, 02:03:33 PM »
- Note that tax loss harvesting is simply postponing taxes. Your basis resets so when we sell for a profit in the future you will pay taxes on a larger amount. Good if you will be in a lower tax bracket when you sell at a profit. Bad if you will be in a higher tax bracket.

Thanks!  I'm been in 0% capital gains tax bracket and will likely stay there.  So the nice thing is I can reduce my ordinary taxable income, and when I harvest gains later, they'll be at 0%.

Yep! Very good strategy.

MustacheAndaHalf

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Re: Prepping for Tax Loss Harvesting
« Reply #7 on: October 12, 2018, 10:05:40 PM »
Short-term gains are taxed at a higher rate than long-term gains.  But if you don't have any short-term gains, it might not make sense to tax loss harvest now.  It sounds like you'd just be reducing the amount of 0% tax you pay...

For next time (or other readers), it's helpful to locate similar investments to switch into.  For example with VTSAX (Vanguard Total Stock Market) you might switch to VFIAX (Vanguard S&P 500).  They have a lot of overlap, but aren't the same.  Another aspect of the wash sale rule is buying something that isn't "substantially identical", which is why knowing an alternative can be helpful for tax loss harvesting.

secondcor521

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Re: Prepping for Tax Loss Harvesting
« Reply #8 on: October 13, 2018, 12:14:07 AM »
If you already have a $5K realized capital gain this year that will be taxed at 0%, I would not do any tax loss harvesting this year.

If you realize a capital loss this year, the first $5K of it will just offset against your $5K realized capital gain, and you will save zero in taxes.  If you wait a few months and realize that same capital loss, it will instead likely offset 12% ordinary income taxes.  Would you rather save 12% of your first $5K of realized losses or 0%?

If you wait a few months and don't realize a capital loss because your investment has recovered, well that's pretty good too.

Finally, I seriously doubt you will have anywhere near $8K in unrealized capital losses by the end of the year.  But I'm a pretty relentless optimist.

In fact, what I would be looking to do in your shoes is capital gain harvesting.  If you have any lots that show a gain, you can probably sell them today and buy them back tomorrow.  Your capital gain will add to your AGI but your federal income tax on the additional gain could be 0%.  Note that you might pay state income taxes on the gain, and a higher AGI might affect your ACA tax credits and FAFSA situation (or any other AGI-based things) if either of those apply to you.

catccc

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Re: Prepping for Tax Loss Harvesting
« Reply #9 on: October 14, 2018, 11:08:18 AM »
Thanks mustacheandahalf!  Thanks secondcor521!

Yes, I am aware that the first 5K will do nothing for me given my already realized capital gains.

And thanks for including the info on VTSAX and VFIAX, mustacheandahalf! That is something I picked up from the forums when I harvested losses previously, and this dissimilar pair is good to know!

I think secondcor521 might be right about losses not getting anywhere near 8K... I'm generally and optimist, too!  Looking at gain harvesting is something I haven't really considered.  However, as noted, the gains could throw our AGI out of the traditional IRA deductibility limit, and the deductible IRA is part of our current tax strategy.   We are very close to the limit as is.  Perhaps closer to year end I will see if there is any advantage to be had with such a move without affecting our ability to deduct our IRA contributions.  Very good point, though especially since I never exchanged the VFIAX from the last harvesting move I made back to VTSAX, so I've been unintentionally holding VFIAX for years now.  And unwilling to sell it due to the tax impact of additional income.

jacoavluha

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Re: Prepping for Tax Loss Harvesting
« Reply #10 on: October 14, 2018, 08:36:44 PM »
So you have $5k in gains taxed at 0%. In this situation I would not harvest small losses. Better off to wait. Why harvest losses to offset untaxed gains? Better to sit on the losses until they’re big enough to make a difference, or wait until next year.