Tax Loss Harvesting and Short-term redemption fees

[jeromedawg]

Hi all,

I was wondering if it's possible to do tax loss harvesting on funds that have been purchased pretty recently (back on 11/21/14). And if it is possible to do this, is it still worth doing despite any short-term redemption fees that may be applied?

[seattlecyclone]

There's no minimum holding period for recognizing a capital loss on your tax return. As to whether it's worthwhile, you'll have to do the math yourself. You'll be deferring (loss * tax rate) in taxes and paying (redemption fee * value of asset) in fees. My guess is that the market hasn't gone down enough in the past month to make tax losses outweigh most early redemption fees, but it all depends on how much the fee would be and what your tax rate is.

[jeromedawg]

There's no minimum holding period for recognizing a capital loss on your tax return. As to whether it's worthwhile, you'll have to do the math yourself. You'll be deferring (loss * tax rate) in taxes and paying (redemption fee * value of asset) in fees. My guess is that the market hasn't gone down enough in the past month to make tax losses outweigh most early redemption fees, but it all depends on how much the fee would be and what your tax rate is.

Thanks!

If the short term redemption fee is say ".75%" is that of the *entire* amount that I initially would have contributed? So let's say I contributed $5000 into a fund with a .75% short term redemption fee and then decided to sell it all in the short term and the value is now at $4500 - what would that come out to be in terms of fees? Not sure I calculated it correctly but I see "$3350" (.75 * 4500???)

[Dodge]

There's no minimum holding period for recognizing a capital loss on your tax return. As to whether it's worthwhile, you'll have to do the math yourself. You'll be deferring (loss * tax rate) in taxes and paying (redemption fee * value of asset) in fees. My guess is that the market hasn't gone down enough in the past month to make tax losses outweigh most early redemption fees, but it all depends on how much the fee would be and what your tax rate is.

Thanks!

If the short term redemption fee is say ".75%" is that of the *entire* amount that I initially would have contributed? So let's say I contributed $5000 into a fund with a .75% short term redemption fee and then decided to sell it all in the short term and the value is now at $4500 - what would that come out to be in terms of fees? Not sure I calculated it correctly but I see "$3350" (.75 * 4500???)

It's not 75%, it's 0.75%, less than 1%.

Instead of multiplying by 0.75, you multiply by 0.0075

[jeromedawg]

There's no minimum holding period for recognizing a capital loss on your tax return. As to whether it's worthwhile, you'll have to do the math yourself. You'll be deferring (loss * tax rate) in taxes and paying (redemption fee * value of asset) in fees. My guess is that the market hasn't gone down enough in the past month to make tax losses outweigh most early redemption fees, but it all depends on how much the fee would be and what your tax rate is.

Thanks!

If the short term redemption fee is say ".75%" is that of the *entire* amount that I initially would have contributed? So let's say I contributed $5000 into a fund with a .75% short term redemption fee and then decided to sell it all in the short term and the value is now at $4500 - what would that come out to be in terms of fees? Not sure I calculated it correctly but I see "$3350" (.75 * 4500???)

It's not 75%, it's 0.75%, less than 1%.

Instead of multiplying by 0.75, you multiply by 0.0075

Ah okay, I figured my math was off :X

So in my case, I bought $50k worth of FSGDX back on 11/21/14. It currently has a loss of $3,777.42 so current value $46,222.57. The short term redemption fee is 1.00% within 90 days. So if I were to decide to tax loss harvest on this, would the math be something like $3,777.42 (loss) - $462.23 (1% of the current value) = $3315.19 (for losses that can be claimed in 2014)? And then I would wait until around January 15th to re-buy the fund?

[seattlecyclone]

So if I were to decide to tax loss harvest on this, would the math be something like $3,777.42 (loss) - $462.23 (1% of the current value) = $3315.19 (for losses that can be claimed in 2014)? And then I would wait until around January 15th to re-buy the fund?

You need to multiply your loss by the tax rate to translate it into the amount of money you would actually receive. Capital losses cancel out capital gains first, and can only count against your regular income by $3,000 per year.

Let's suppose you're in the 25% tax bracket and have previously sold stock this year for $500 in long-term gains. These gains would otherwise be taxed at 15%.

The first $500 of losses would cancel out your gains, saving you ($500 * 15% = $75). The next $3,000 would count against your regular income, saving you ($3,000 * 25% = $750). You would save $825 on your taxes by selling your losing fund. The remaining $277.42 of losses that you can't claim this year would carry over to the next year, canceling out 2015 gains or regular income.

Yes, you would want to wait 30 days to buy back the fund, otherwise it counts as a wash sale and you can't claim the loss on your taxes.

[Dodge]

There's no minimum holding period for recognizing a capital loss on your tax return. As to whether it's worthwhile, you'll have to do the math yourself. You'll be deferring (loss * tax rate) in taxes and paying (redemption fee * value of asset) in fees. My guess is that the market hasn't gone down enough in the past month to make tax losses outweigh most early redemption fees, but it all depends on how much the fee would be and what your tax rate is.

Thanks!

If the short term redemption fee is say ".75%" is that of the *entire* amount that I initially would have contributed? So let's say I contributed $5000 into a fund with a .75% short term redemption fee and then decided to sell it all in the short term and the value is now at $4500 - what would that come out to be in terms of fees? Not sure I calculated it correctly but I see "$3350" (.75 * 4500???)

It's not 75%, it's 0.75%, less than 1%.

Instead of multiplying by 0.75, you multiply by 0.0075

Ah okay, I figured my math was off :X

So in my case, I bought $50k worth of FSGDX back on 11/21/14. It currently has a loss of $3,777.42 so current value $46,222.57. The short term redemption fee is 1.00% within 90 days. So if I were to decide to tax loss harvest on this, would the math be something like $3,777.42 (loss) - $462.23 (1% of the current value) = $3315.19 (for losses that can be claimed in 2014)? And then I would wait until around January 15th to re-buy the fund?

I don't think the government cares about the redemption fee. Honestly though, I think it's more trouble than it's worth. Remember, tax loss harvesting reduces your cost basis, so you'll owe that $3315.19 in tax later on when you sell the holdings. The redemption fee makes this not worth it in my opinion. My standard advice is to keep it simple.

[Joel]

All tax loss harvesting does is reduce your cost basis. If you plan to reinvest those dollars, you it will eventually grow, and you will have to pay capital gains on those dollars. You will be trading the 1% redemption fee in hope that the taxes it saves this year is lower than the taxes you pay on it in the future. It's very likely not worth it at all.