Author Topic: Tax-Loss Harvesting Idea- Am I on to something or missing something?  (Read 3032 times)

EarlyStart

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So I recently switched from Fidelity to Vanguard for a few reasons, but it was partly to harvest tax losses. My portfolio isn't significantly different or anything, and I still have an (empty) Fidelity account.


This got me thinking, if I hold essentially the same assets (but based on different indices- CRSP vs S&P vs Russell etc.) in funds at both Vanguard and Fidelity, I might be able to seamlessly and more frequently harvest tax losses. I could contribute solely to one account or the other in 3 or 6 month periods and switch off. Whenever the market takes a decent dip, I sell part of whichever account has a higher cost basis and transfer to the other one.

If I avoid transaction costs by holding for whatever the necessary penalty-free period, maybe I could accumulate significant carryforward deductions. It's late and I'm pretty out of it, so am I missing something arbitrary here?



seattlecyclone

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Re: Tax-Loss Harvesting Idea- Am I on to something or missing something?
« Reply #1 on: November 20, 2015, 12:25:39 PM »
From what I've read, the law is rather vague about how "substantially identical" different securities need to be in order to avoid the wash sale rule. See more information at Kitces' blog. All of the big robo-advisors do essentially what you're proposing and there has not been any IRS crackdown that I know of. That doesn't mean there couldn't be in the future.

EarlyStart

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Re: Tax-Loss Harvesting Idea- Am I on to something or missing something?
« Reply #2 on: November 20, 2015, 08:25:05 PM »
From what I've read, the law is rather vague about how "substantially identical" different securities need to be in order to avoid the wash sale rule. See more information at Kitces' blog. All of the big robo-advisors do essentially what you're proposing and there has not been any IRS crackdown that I know of. That doesn't mean there couldn't be in the future.

I appreciate your response. That blog post is helpful. I'm pretty clear on what constitutes "substantially identical", or at least as clear as we can be given the vagueness of the law.


What do you think about holding substantial amounts in the two separate brokerages though? In particular, contributing to only one account for a 6 month period, then the other for the next six months, ad infinitum, so that they always have different cost bases?


Tjat

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Re: Tax-Loss Harvesting Idea- Am I on to something or missing something?
« Reply #3 on: November 21, 2015, 09:31:45 AM »
Could work, or you could just have two Vanguard accounts. A wash sale refers to the type of index (ie Vanguard and Fidelity S&P indexes are considered the same) If I understand correctly, your strategy is this:

So
Have 10K in VTSAX in Account 1 at cost basis X
Have 10K in VTSAX in Account 2 at cost basis 0.95X

Sell Acct2 VTSAX
Buy Total World Index in Acct 1
After 30 days start contributing to VTSAX in account 2
Sell Total World Index (if you want) and buy VTSAX in account 1

Works, but I think this is far too complex. If you do individual lot identification, you can consolidate your VTSAX investments into 1 account and just periodically sell the loser for the total world index and revert back into VTSAX after 30 days.


seattlecyclone

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Re: Tax-Loss Harvesting Idea- Am I on to something or missing something?
« Reply #4 on: November 21, 2015, 09:36:34 AM »
Whether you hold your money in one account or a million makes no difference for the wash sale rule. I try to keep things simple (and often fail!), but if you think it would be easier with two accounts then you should go ahead and do that.

EarlyStart

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Re: Tax-Loss Harvesting Idea- Am I on to something or missing something?
« Reply #5 on: November 22, 2015, 04:54:22 PM »
Could work, or you could just have two Vanguard accounts. A wash sale refers to the type of index (ie Vanguard and Fidelity S&P indexes are considered the same) If I understand correctly, your strategy is this:

So
Have 10K in VTSAX in Account 1 at cost basis X
Have 10K in VTSAX in Account 2 at cost basis 0.95X

Sell Acct2 VTSAX
Buy Total World Index in Acct 1
After 30 days start contributing to VTSAX in account 2
Sell Total World Index (if you want) and buy VTSAX in account 1

Works, but I think this is far too complex. If you do individual lot identification, you can consolidate your VTSAX investments into 1 account and just periodically sell the loser for the total world index and revert back into VTSAX after 30 days.

I wouldn't want to substitute world index for the U.S. index, but I get what you're saying.

EarlyStart

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Re: Tax-Loss Harvesting Idea- Am I on to something or missing something?
« Reply #6 on: November 22, 2015, 04:55:42 PM »
Whether you hold your money in one account or a million makes no difference for the wash sale rule. I try to keep things simple (and often fail!), but if you think it would be easier with two accounts then you should go ahead and do that.

Yeah, my only reason for having it at two different brokerages is the commission free aspect of Vanguard funds at Vanguard and Fidelity funds at Fidelity.