Tax Loss Harvesting

[felizcortez]

I have about 12k of short term capital losses in VTIAX at Vanguard that I'm considering doing some Tax Loss Harvesting on before the end of the year to offset some short term capital gains and carry over for a few years.

I've never done TLH before so I'm looking for some recommendation on which fund to use to replace VTIAX.  After 31 days I'd transfer back into VTIAX from whatever fund I move into.

[SuperSecretName]

VFWAX

[johnny847]

The replacement fund cannot be "substantially identical". The IRS has never specified what "substantially identical" actually means, but most people generally regard two funds that track different indices not to be substantially identical.

At Vanguard, a good choice is VFWAX, which tracks the FTSE All World ex US index, as opposed to VTIAX's FTSE Global All Cap ex US index.
VFWAX doesn't hold small caps. If this concerns you, you can buy VFSVX (VSS for the ETF) which tracks the FTSE All World Ex US Small Cap index. Hold VFWAX:VFSVX in a 9:1 ratio.

However, I highly recommend NOT switching back to VTIAX if there are any unrealized gains in VFWAX. If you did switch back in this scenario, then you would experience some capital gains, reducing the benefit of your tax loss harvest. Just keep holding VFWAX (and keep buying VFWAX, not VTIAX. Otherwise this can complicate future TLH because you can run into a situation where you need a 3rd TLH substitute). It's performance will be nearly identical to VTIAX.

[felizcortez]

I am reading up on the wash sale rule before I execute on this trade and this is what I found.  My concern is I've been buying additional shares at least twice a month and throwing additional money into the investment account to buy VTSAX and VTIAX.  The 30 days before and 30 days after you purchase a security will mean that anything I've bought within the last month would trigger a wash sale?  Am I reading this correctly?

DEFINITION of 'Wash-Sale Rule'
An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security in a wash sale. The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so. A wash sale also results if an individual sells a security, and the spouse or a company controlled by the individual buys a substantially equivalent security.

[johnny847]

I am reading up on the wash sale rule before I execute on this trade and this is what I found.  My concern is I've been buying additional shares at least twice a month and throwing additional money into the investment account to buy VTSAX and VTIAX.  The 30 days before and 30 days after you purchase a security will mean that anything I've bought within the last month would trigger a wash sale?  Am I reading this correctly?

Yes this is correct. This is why I only buy shares once a month.

[felizcortez]

I am reading up on the wash sale rule before I execute on this trade and this is what I found.  My concern is I've been buying additional shares at least twice a month and throwing additional money into the investment account to buy VTSAX and VTIAX.  The 30 days before and 30 days after you purchase a security will mean that anything I've bought within the last month would trigger a wash sale?  Am I reading this correctly?

Yes this is correct. This is why I only buy shares once a month.

Well crap...  Looks like I won't be able to harvest the losses before the end of the year then without triggering Wash sales rules and complicating the tax situation.

That sucks because I was planning on offsetting some gains this year and have about 15k of losses I could recognize.

My wife and I are planning ot leave our jobs next year so the additional 3k against income would have been nice for two years instead of one. 

[johnny847]

I am reading up on the wash sale rule before I execute on this trade and this is what I found.  My concern is I've been buying additional shares at least twice a month and throwing additional money into the investment account to buy VTSAX and VTIAX.  The 30 days before and 30 days after you purchase a security will mean that anything I've bought within the last month would trigger a wash sale?  Am I reading this correctly?

Yes this is correct. This is why I only buy shares once a month.

Well crap...  Looks like I won't be able to harvest the losses before the end of the year then without triggering Wash sales rules and complicating the tax situation.

That sucks because I was planning on offsetting some gains this year and have about 15k of losses I could recognize.

My wife and I are planning ot leave our jobs next year so the additional 3k against income would have been nice for two years instead of one.

So there is one "exception." It's not really an exception, it's just a consequence of the rules.

If you TLH and the purchases from the past 30 days are included in the shares you just sold, then there effectively isn't a wash sale.

Why is that? Well, what actually happens with a wash sale is the disallowed loss is added to the basis of the shares that incurred the wash.

So for example, say you bought 10 shares of VTSAX on 12/1. Today on 12/11, you sell a bunch of shares of VTSAX to TLH, including the shares bought on 12/1. The total loss from all of the shares you sold is $5000.
Now by IRS rules you have a wash sale because you bought shares of VTSAX within the 61 day window surrounding 12/11. So you add the disallowed loss of $5000 to the shares bought on 12/1 (the ones that incurred the wash sale).
But you sold the shares you bought on 12/1! So in the end, you reap the benefits of the $5000 capital loss.


Hopefully that made sense.

Vanguard also agrees with me. When I sold shares of VTIAX to TLH, I had bought some VTIAX shares within the past 30 days. Vanguard said I had a wash sale, an added the disallowed loss to the basis of the sales that incurred the loss. But I had also sold those shares, so in the end I am able to claim the full capital loss.

[Apocalyptica602]

Posting because I'm in a similar situation.

My taxable account is purely VTIAX and has shown a loss this year (unrealized long term loss of ~2100 and unrealized short term loss of ~60). I haven't been contributing regularly to it, but I dropped a ~18k windfall into it over a year ago and just left it alone.

So I'm safe from wash sale as long as I don't rebuy a 'substantially identical asset' (e.g. VFWAX)within 31 days?

From my research as well, since we're MFJ, I can claim the entire ~2160 as a reduction of our taxable income since the limit is 3k correct?

Thanks for any advice!

[johnny847]

Posting because I'm in a similar situation.

My taxable account is purely VTIAX and has shown a loss this year (unrealized long term loss of ~2100 and unrealized short term loss of ~60). I haven't been contributing regularly to it, but I dropped a ~18k windfall into it over a year ago and just left it alone.

So I'm safe from wash sale as long as I don't rebuy a 'substantially identical asset' (e.g. VFWAX)within 31 days?

From my research as well, since we're MFJ, I can claim the entire ~2160 as a reduction of our taxable income since the limit is 3k correct?

Thanks for any advice!

From upthread

The replacement fund cannot be "substantially identical". The IRS has never specified what "substantially identical" actually means, but most people generally regard two funds that track different indices not to be substantially identical.

By this logic, it is perfectly fine to buy VFWAX within 31 days of selling VTIAX and not incur a wash sale.

It would be a wash sale to sell VTIAX and within 31 days by the ETF version, VXUS.

[MDM]

I am reading up on the wash sale rule before I execute on this trade and this is what I found.  My concern is I've been buying additional shares at least twice a month and throwing additional money into the investment account to buy VTSAX and VTIAX.  The 30 days before and 30 days after you purchase a security will mean that anything I've bought within the last month would trigger a wash sale?  Am I reading this correctly?

Yes, but...

...If you had 100 shares in the account, bought 4 more in the last month, and now sell the 100 original shares you still get to harvest the loss on 96 of the shares.  Only 4 of the shares are subject to wash sale rules.

[felizcortez]

When you turn off dividend reinvestment do you send it to an external bank or a Vanguard Money Market account so it is easier to reinvest?

I also tried to turn off dividend reinvestment in my tax advantaged accounts, but there was no option for a money market account and it wouldn't let me send externally because that would be taking distributions when you aren't 59.5.

Any recommendations?

[BlueBeard]

Just went through that. Upgrade to brokerage account then you can keep it in a mm account.

[johnny847]

When you turn off dividend reinvestment do you send it to an external bank or a Vanguard Money Market account so it is easier to reinvest?

I also tried to turn off dividend reinvestment in my tax advantaged accounts, but there was no option for a money market account and it wouldn't let me send externally because that would be taking distributions when you aren't 59.5.

Any recommendations?

I personally use a money market account because I don't like having money sent to my bank account if I'm just going to send the money back.

What Bluebeard said about getting a brokerage account. When you get one you'll designate a money market fund as the sweep account which will eliminate the minimum investment requirement for that fund.

Also, Vanguard has a quirk which is relevant if you don't have the upgraded merged account (I currently have a "normal" account for just mutual funds and I have a brokerage account for stocks and ETFs). Dividends cannot be redirected to a fund that has a zero balance. I learned this the hard way - I set dividends set to be redirected to my money market fund in my tIRA but it had a zero dollar balance, so they cut me a check. Which is a withdrawal. Fortunately there is the one non custodian to custodian rollover per year rule which let's me avoid the taxes and penalties so long as I redposited the money within 60 days (which I did).