Author Topic: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?  (Read 9442 times)

catccc

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Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« on: August 25, 2015, 08:26:00 AM »
I feel compelled to take advantage of tax loss harvesting right now. 

My taxable account is with Vanguard and the "sell" candidates are VTIAX and VTSAX.  But what do I buy when I sell these?  How does the IRS define a "substantially identical" security?

And then 30 days after the sale, I can just exchange back to my preferred funds, correct?

Aphalite

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #1 on: August 25, 2015, 08:31:41 AM »
You can avoid wash sale rules if you buy something like Fidelity's Spartan Total Market Index. Remember to wait 31 days - it's all transactions within a 30 day window, so if you sold on the 1st, you need to wait until the 31st

GGNoob

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #2 on: August 25, 2015, 08:52:28 AM »
If the benchmark index is different than the one you are selling, you can buy it without causing a wash sale.

Here's what I would do:

Sell VTSAX and buy VFIAX (S&P 500)
Sell VTIAX and buy VFWAX (FTSE All-World Ex-US)

Yes, after 30 days, you can exchange back. But if stocks continue to go down, continue to hold and TLH back into your original funds.
« Last Edit: August 25, 2015, 08:54:26 AM by MillionairesInTen »

catccc

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #3 on: August 25, 2015, 09:47:16 AM »
Thanks all.  And from a logistical perspective, I can do an "exchange" at Vanguard online the site to execute this, correct?

Also, I'm in the 15% tax bracket, and expect to stay here for a while.  I don't expect that much in the way of capital gains this year, which wouldn't be taxable anyway, so the advantage here is to use the up-to-$3K loss allowance to offset ordinary income, correct?  That would save me $450 in taxes.  So I need to figure out what I expect capital gains to be, add $3K to that and harvest losses to that amount.  There's no other advantage, correct?

Let me know if I'm missing anything here!

Magclaw

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #4 on: August 25, 2015, 10:15:49 AM »
You do not need to bother calculating anything. Just harvest the maximum loss you can and you can carry-over that loss that exceeds 3k in the future tax years. Turbotax even does it automatically for you.

Can anyone else give insight about tax consequences of selling VTSAX and buying VFIAX. Would the IRS not see those as "substantially identical", since they have such a high correlation?

I was about to do something similar with VTI->SPY.

bacchi

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #5 on: August 25, 2015, 10:34:20 AM »
Can anyone else give insight about tax consequences of selling VTSAX and buying VFIAX. Would the IRS not see those as "substantially identical", since they have such a high correlation?

I was about to do something similar with VTI->SPY.

I'd feel comfortable doing it. One is only ~500 stocks, while the other is ~3000, even if the mega-large caps dominate both.
« Last Edit: August 25, 2015, 10:36:05 AM by bacchi »

catccc

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #6 on: August 25, 2015, 11:07:42 AM »
You do not need to bother calculating anything. Just harvest the maximum loss you can and you can carry-over that loss that exceeds 3k in the future tax years. Turbotax even does it automatically for you.

Can anyone else give insight about tax consequences of selling VTSAX and buying VFIAX. Would the IRS not see those as "substantially identical", since they have such a high correlation?

I was about to do something similar with VTI->SPY.

Oh, I forgot about carry over! 

But since I can't pick and choose when to use the carryover, does it make sense to harvest the max loss?  If I have capital gains next year of $3K, the loss carryover will essentially be useless since I don't get taxed on capital gains, anyway, right?  I only want the loss to go against ordinary income, and I have a better idea of what my capital gains will be for this year v. next.  Also, over harvesting could mean bigger gains later, and if I move into the 25% tax bracket, then sadface.

catccc

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #7 on: August 25, 2015, 12:00:28 PM »
Ha.  My taxable account only has $2,700 of losses to harvest.  I guess I don't need to bother calculating anything, then.

CanuckExpat

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #8 on: August 27, 2015, 09:43:11 AM »
If the benchmark index is different than the one you are selling, you can buy it without causing a wash sale.

Here's what I would do:

Sell VTSAX and buy VFIAX (S&P 500)
Sell VTIAX and buy VFWAX (FTSE All-World Ex-US)

Yes, after 30 days, you can exchange back. But if stocks continue to go down, continue to hold and TLH back into your original funds.

I agree about TLH back into original funds if stocks continue to go down, but not sure what you mean about exchanging back to original funds after 30 days. Wouldn't that only work if markets stay relatively flat? If markets go up in thirty days and you exchange back, it seems you'd incur a capital gain that would offset some of your tax loss harvesting. I'd rather save the capital losses to reduce my ordinary income. Am I misunderstanding?

To the OP's question, for what it's worth I exchanged VTIAX for a combination of 90% VFWAX and 10% VFSVX
I think that better approximates VTIAX with the added small cap, but is probably not neccesarry since the large caps dominate as others mentioned.

Similarly, if markets stay down and I don't get lazy I'll probably exchange out VTSAX for a combination of the SP 500 and the Vanguard extended market completion fund.

Anyways, we are already set to save about $750 on taxes this year and next depending on tax brackets, so not bad for a few minutes work and some extra record keeping.

Clean Shaven

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #9 on: August 27, 2015, 10:44:02 AM »
I've never done TLH, and am learning about it now --

I currently have a loss of about $5K, all in VTSAX.  If I exchange it for VTIAX or VLCAX (as suggested by the Mad Fientist as a comparable to VTSAX - link below), I think the steps below are what I would want to do -- and anyone, please correct me if I'm doing it wrong:

Mad Fi link on TLH:
http://www.madfientist.com/tax-loss-harvesting/

1) Exchange 100% of VTSAX for VLCAX.
2) Do not buy any more VTSAX for at least 30 days.
3) Hold VLCAX (in the amount exchanged in step 1) for 1 year -- so as to benefit from long-term capital gains.
4) After 1 year, if I want, exchange VLCAX back into VTSAX.

Question:  If I exchange 100% of VTSAX for VLCAX, can I resume purchasing VTSAX 30 days after the exchange, using new money (i.e. cash purchase)?  Would any gains in VTSAX bought with new money have to be offset against the loss I am seeking to harvest?  And if so, would it be wiser to halt ALL new money purchases of VTSAX for 1 full year (instead investing in VLCAX)?

Clean Shaven

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #10 on: August 27, 2015, 10:56:53 AM »
Also, I forgot to mention:

I also hold a lot of VTTHX (target 2035 retirement fund), which in turn holds a lot of its assets in VTSMX (investor class of VTSAX).  Is that going to prevent me from doing TLH of VTSAX in my taxable account?

PencilThinMustache

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #11 on: September 28, 2015, 09:24:10 AM »
clean shaven:

I share your concern about the target retirement fund holding the same assets.  I think this would pose a problem.  Likewise, you may have some VTSAX in your 401k or IRA and that also poses a problem.  I'm not an accountant but I think TLH is a bit more complex than madFIesntist makes it out to be, especially if you're paranoid about IRS rules

That being said, I think your summary of the steps is spot on.  But the other step you left out which I think is important (and was mentioned by Mad FI in the post) is manual reinvestment of dividends.  Imagine if you left it on automatic and a few days after you sold VTSAX, the dividend came thru and vanguard automatically "bought" more VTSAX with it.  There goes the wash sale rule!

I think for folks in low tax brackets it doesn't make much sense to mess with this stuff...

PencilThinMustache

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #12 on: September 28, 2015, 09:31:01 AM »
from IRS:

You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

1.Buy substantially identical stock or securities,

2.Acquire substantially identical stock or securities in a fully taxable trade,

3.Acquire a contract or option to buy substantially identical stock or securities, or

4.Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.


If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.

If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.


Example 1.

You buy 100 shares of X stock for $1,000. You sell these shares for $750 and within 30 days from the sale you buy 100 shares of the same stock for $800. Because you bought substantially identical stock, you cannot deduct your loss of $250 on the sale. However, you add the disallowed loss of $250 to the cost of the new stock, $800, to obtain your basis in the new stock, which is $1,050.


Example 2.

You are an employee of a corporation with an incentive pay plan. Under this plan, you are given 10 shares of the corporation's stock as a bonus award. You include the fair market value of the stock in your gross income as additional pay. You later sell these shares at a loss. If you receive another bonus award of substantially identical stock within 30 days of the sale, you cannot deduct your loss on the sale.

mrpercentage

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #13 on: September 29, 2015, 07:12:47 PM »
I'm thinking of doing this for individual securities. PAH is down almost 50%. I highly doubt I will miss a 100% upswing in 31 days

Scandium

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #14 on: September 30, 2015, 12:11:23 PM »
Glad I read this. I think I may have screwed up some TLH. Thankfully very little. I sold off some VTIAX with losses because we needed some cash, figured I might as well get the tax loss rather than using cash. But I forgot that my 401k goes into VTIAX every 2 weeks! So I guess I can't claim those losses come tax time, bummer.

Now, I could take the losses in VTSAX, as my 401k only has the S&P fund and extended market. Or I think so? Those two "combine" into VTSAX, but would that run afoul of the IRS rules? Starting to think this is to confusing and messy to bother with..

brooklynguy

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Re: Tax Loss Harvesting from VTIAX and VTSAX. What to buy?
« Reply #15 on: September 30, 2015, 12:31:36 PM »
There's an unfortunate lack of clarity in the law on the meaning of "substantially identical" as it pertains to mutual funds and ETFs, as discussed in the Kitces article linked to (and commented on) in this thread:

http://forum.mrmoneymustache.com/investor-alley/tax-loss-harvesting-index-funds-wash-sales/