Questions on tax loss harvesting

[FireLane]

It's been a bull market for most of my investing career, so I've never had a chance to do tax-loss harvesting before. But this is a good time to dip my toe in the water. My taxable Vanguard account has a motley assortment of VFIAX, VIMAX, VSMAX, VTSAX, VTIAX and VTWAX, and I'd like to simplify.

I've read Physician on FIRE's post and a few others, and I still have some questions that I was hoping some more knowledgeable Mustachians could answer.

1) What matters and what doesn't for wash-sale purposes: Holdings in a 401(k) or 403(b) don't count, but new investments in a regular or Roth IRA do matter, correct? What about a 529 or an HSA? (There seemed to be some debate about this in the comments on POF's post.)

2) I had automatic dividend reinvesting turned on in my taxable account. As I understand it, to avoid a wash sale, you can't have bought any shares of the same index fund in either the 30 days before or the 30 days after you sell the shares that have a loss.

Since Q1 dividends were recently paid out, I have a problem there. Is it true that I can avoid a wash sale by selling the shares that were purchased as part of that reinvestment? Or would it be better/easier to just wait until it's been at least 30 days since dividends were paid out and do my TLH then?

3) I know that there are both short-term capital gains, which are for shares held less than a year and which are taxed the same as ordinary income, and long-term capital gains, which are for shares held for a year or more and are taxed at more favorable rates.

If I TLH some shares of both, how does that work? Is there one "bucket" of deductions that I can apply to any kind of capital gains? Or do the deductible losses on short-term holdings only apply to short-term capital gains and the losses on long-term holdings only apply to long-term capital gains?

[NotJen]

1) What matters and what doesn't for wash-sale purposes: Holdings in a 401(k) or 403(b) don't count, but new investments in a regular or Roth IRA do matter, correct? What about a 529 or an HSA? (There seemed to be some debate about this in the comments on POF's post.)

All investment purchases count, including 401k.  I've never had a 529 or HSA, so I haven't done the research on those, but I assume they count, too.

My 401k is invested in a target date fund, while my taxable holdings are in individual indexes, so that made it easy to avoid a wash sale with the 401k contributions.

Since Q1 dividends were recently paid out, I have a problem there. Is it true that I can avoid a wash sale by selling the shares that were purchased as part of that reinvestment? Or would it be better/easier to just wait until it's been at least 30 days since dividends were paid out and do my TLH then?

I think it would be easier to wait 30 days (personal opinion).  Or you could sell the recently purchased shares, or just let that amount (which might be small?) be disallowed.

I keep auto reinvesting turned off for my taxable account for this reason.  I didn't have to do it this year, but previously I temporarily turned off my IRAs reinvesting when TLH.

If I TLH some shares of both, how does that work? Is there one "bucket" of deductions that I can apply to any kind of capital gains? Or do the deductible losses on short-term holdings only apply to short-term capital gains and the losses on long-term holdings only apply to long-term capital gains?

See Schedule D for how the math works out.

First losses go to offset gains, and you apply short-term losses to short-term gains, and long-term losses to long term gains.  Anything left over (or if you don't have any realized gains to offset), is added together to offset ordinary income, up to $3k per year.

[EricEng]

1) What matters and what doesn't for wash-sale purposes: Holdings in a 401(k) or 403(b) don't count, but new investments in a regular or Roth IRA do matter, correct? What about a 529 or an HSA? (There seemed to be some debate about this in the comments on POF's post.)

Depends on if you are concerned with practical or letter/intent of the law.
Legally: All accounts you have anywhere count against each other for wash sales.
Practically: Only wash sales in the same account  matter and are reported automatically by brokerage in tax documents.  If you buy a sp500 account in your 401k and sell it from your post tax account, no one is going to connect those dots.

Sales in your 401k do NOT count since you can't claim any loss.

Or do the deductible losses on short-term holdings only apply to short-term capital gains and the losses on long-term holdings only apply to long-term capital gains?

Correct.  Two buckets, one for long term and one for short term.

[FireLane]

Thanks for the explanation, @NotJen and @EricEng!

I took the plunge yesterday. I have some duplicate holdings across accounts in VTSAX and VFIAX, but VTIAX was only in my brokerage account. I swapped it for VTWAX and harvested about $6,000 of losses.

I think I'll turn off automatic reinvesting as well so this will be easier in the future.

[phildonnia]

All investments count, including 401k.  I've never had a 529 or HSA, so I haven't done the research on those, but I assume they count, too.

Depends.  If you sell at a loss in a 401k, and immediately buy in a regular account, it's not a wash sale, because you didn't have a taxable capital loss.  But selling at a loss in a regular account, then buying in a 401(k); that's a wash sale.

In general, only losses that would show up on your Schedule D are subject to the wash sale rules.  That excludes any sales from tax-advantaged accounts.

[Padonak]

Is it a good idea to tax loss harvest more than 3K in losses this year if you expect a decent taxable income this year but very little earned income starting from next year, and dividends/cap gains within 0% tax bracket cap gains tax from next year?

[NotJen]

All investments count, including 401k.  I've never had a 529 or HSA, so I haven't done the research on those, but I assume they count, too.

Depends.  If you sell at a loss in a 401k, and immediately buy in a regular account, it's not a wash sale, because you didn't have a taxable capital loss.  But selling at a loss in a regular account, then buying in a 401(k); that's a wash sale.

In general, only losses that would show up on your Schedule D are subject to the wash sale rules.  That excludes any sales from tax-advantaged accounts.

Yes, I'll amend my comment to say *purchases* count for determining a wash sale in investments including 401ks.

[EricEng]

Is it a good idea to tax loss harvest more than 3K in losses this year if you expect a decent taxable income this year but very little earned income starting from next year, and dividends/cap gains within 0% tax bracket cap gains tax from next year?

That would make it all the better to do it this year.  I am trying to re-balance some highly appreciated assets for instance.  So I'm realizing losses to off set and reinvesting everything since everything is down about the same atm.

In your case, if you expect to be in the 0% for a while, uses the loses while you can.